A Quick Guide to Unsecured Business Loans
A business loan, like a personal loan, can be secured or unsecured. An unsecured loan does not require collateral, which means your valuable assets are safe. Since this puts the risk on the lender expect higher rates and lower borrowing limits.
Whether you’re looking for short-term funding to see you through a tough spot, or you’re in a position to grow your business, unsecured business loans are an option. But how do they work, who are they for, and should you consider one?
Our guide covers the main points you need to know.
What is an unsecured business loan?
An unsecured business loan is a source of finance that is not secured against an asset the company owns.
For example, a secured business loan might use the firm’s property or equipment as collateral. This means that, if the borrower defaults, the lender can seize this property and sell it to recoup what’s owed.
With an unsecured loan, there’s more risk to the lender so you are more likely to be asked to give a personal guarantee, which means putting your own money and even potentially your home on the line. This is risky as it means you are entangling your own finances with that of the business, and you could end up in serious financial trouble. However, you can take out insurance to reduce your liability for a personal guarantee.
How do unsecured business loans work?
As with any loan, you apply for the amount you want to borrow over whatever period suits you, depending on the interest rate and the size of the repayments you can manage.
In order to get a loan you will need to supply information about yourself and your business. The lender will assess this and then carry out credit checks before it decides whether to approve your loan application.
You will also need to work out exactly how much an unsecured loan will cost you over the length of the borrowing term and make sure you can meet repayments even if trading conditions change.
While you may be eager to take your business to the next level saddling yourself with long-term, expensive debt might not be the right option.
What can I use an unsecured business loan for?
You can usually use an unsecured business loan for almost whatever you like, within reason, and you will be asked at application how you intend to use the money.
You can use an unsecured business loan as working capital to help you manage the short-term cashflow in your business. Alternatively, it can act as a longer-term source of finance to help grow your company. You could use it to invest in new equipment, advertising, inventory or property, although for this there are specific types of asset finance focusing on equipment, machinery and property that might be more suitable.
How much can I borrow with an unsecured business loan?
The answer is ‘it depends’. Different lenders have different criteria – some may require your company to have a certain level of turnover or a certain number of years’ accounts. Of course, the profitability of your business, affordability of a loan and your creditworthiness will all also affect how much you can borrow.
In general, unsecured business loans tend to be for smaller amounts repaid over a shorter timeframe such as a few years. The British Business Bank says unsecured loans of more than £40,000 are rare. You can usually borrow higher amounts with secured loans.
It’s worth considering alternative lenders as well as the traditional high street banks when you’re searching for a loan.
» COMPARE: Unsecured Business Loans
You may also be eligible for a government recovery loan announced by the chancellor Rishi Sunak in March 2021.
Pros and cons of unsecured loans
- Unsecured loans can be a valuable source of capital for businesses that don’t have much in the way of physical assets.
- They might be a good solution if you’re looking to borrow a relatively small amount.
- An unsecured business loan will usually be approved quickly as there are no assets to value compared to a secured loan.
- You can apply online and get the money in your bank quickly.
- You’ll need a good credit rating and a long trading history to get the best deals.
- You might not be able to borrow as much if a loan is unsecured, as there is a greater risk to the lender where a loan isn’t backed by an asset you own.
- You might pay more in interest for the same reason.
- In the absence of assets on which to secure a loan, you might be asked to provide a personal guarantee, which means you promise to pay off the loan yourself in the event your business can’t repay.
- You can still be taken to court for non-payment of a loan, even an unsecured one.
An unsecured business loan won’t be the solution for every business, but the right deal could offer your company a step up to the next stage of growth. To learn more, read NerdWallet’s top five reasons to consider a business loan, and our guide to getting a loan with bad credit.
Image Source: Getty Images
Hannah is an award-winning journalist with a background in the trade press. She writes about finance, asset management and business for Shares, Citywire, FE Trustnet, and interactive investor. Read more