Unsecured business loans

What is an unsecured business loan?

An unsecured business loan allows you to borrow money without using assets as collateral. Instead of relying on physical security, lenders make their decision based on your business’s creditworthiness and financial health.

They’ll typically consider factors such as your business credit score, revenue, cash flow, and overall financial stability.

Unsecured loans are flexible and can be used for a variety of needs, like boosting working capital, buying inventory, expanding operations, or investing in new equipment.

How does an unsecured business loan work?

An unsecured loan works by providing your business with fast access to capital, usually in an upfront sum. The process is usually quite fast and applications can be fully completed online, meaning you could get the cash in your bank account in as little as 48 hours.

Once you receive the funds, you'll then repay it back over an agreed upon period. This is usually a fixed amount each month, although this can vary depending on the type of unsecured loan you opt for. You may also be able to repay the loan early if you choose, and this could come with an extra fee.

Secured vs. unsecured business loans

Business loans generally fall into two main types: secured and unsecured.

Secured loans require collateral (valuable assets like property, vehicles, or equipment).

Unsecured business loans, on the other hand, don’t require any collateral. Instead, lenders assess your business’s financial health and creditworthiness.

Unsecured loans are typically faster to access but often come with higher interest rates and shorter repayment terms. They’re considered riskier for lenders, but can be more flexible for businesses that need quick funding.

Examples of unsecured loans

Unsecured loans are a great option for small businesses that don’t have valuable assets, like property or equipment, to offer as collateral. Here are three examples of how different businesses might benefit:

• A small tech company needs money to pay for everyday expenses like employee salaries, office rent, and utility bills while they are growing quickly.
  Why choose an unsecured loan? The company rents its office space. Most of what it owns, like software and creative content, can't be used as security for a loan.

•  A chain of cafes wants to pay for a big advertising push to introduce a new menu item and attract more customers.
  Why choose an unsecured loan? The cafe rents equipment and furniture and they don't own the buildings they operate in, so they can't use these as security for a loan.

• A graphic design business needs short-term funding to cover project expenses while awaiting client payments for completed work.
  Why choose an unsecured loan? The business is run from a home office with very few physical items. 

What types of unsecured business loans can I apply for?

Term loan

An unsecured business term loan provides a lump sum of money upfront. This is repaid by the business over a fixed term with regular payments. The length of the terms can vary depending on the business and lender, it can range from a few months to 5 years.

Revolving credit facility 

A revolving credit facility gives you access to a predetermined amount of funds that you can draw from as needed. Interest is only charged on the amount you borrow, and you can repay and reuse the funds within the credit limit.

Business credit card

Business credit cards are a type of unsecured business loan. Businesses typically use it to cover everyday expenses. They offer a revolving line of credit, allowing you to make purchases and repay the balance over time. 

Merchant cash advance

Merchant cash advances are unsecured business loans that provide a lump sum of cash. Repayment is not fixed but a predefined percentage of your future sales. Lenders typically deduct a fixed percentage from your monthly credit card sales until the advance is repaid.

Who are unsecured business loans for?

Whether you're taking on a new project, looking to expand your workforce or simply need a hand covering the day to day running costs of your business, unsecured business loans can help to provide the working capital you need. 

To be eligible for an unsecured business loan you'll most likely need:

• At least 3 - 6 months trading history

• 3 - 6 months bank statements

• Last set of filed accounts (if available)

Interest rates on unsecured loans

Unsecured business loans typically come with higher interest rates than secured loans. This is because there's no collateral involved, making the loan riskier for the lender. To compensate for that added risk, lenders often charge higher rates.

Having a strong business credit score can work in your favour. Businesses with good credit and a solid financial track record may qualify for more competitive rates, even without offering assets as security.

Repercussion for defaulting on unsecured business finance

Defaulting on an unsecured business loan can have serious implications for your business and personal financial health. Initially, the lender will likely contact you to discuss the missed payments and may offer alternative repayment plans. If defaults continue, lenders can escalate the matter to debt collection agencies, which may result in increased pressure through frequent contact and demands for payment. This not only affects your business operations but could potentially harm your credit rating, making it more challenging to secure future financing.