Unsecured business loans are a type of borrowing where regular payments are made each month until the full amount is paid back. Because the loan isn’t tied to any security, the interest rates tend to be higher. But knowing when and how to use unsecured business loans can be the difference between success and failure for your business.
How Unsecured Business Loans Work
Unsecured loans work in much the same way as any other loans do: working capital is extended to the company and the company then repays this over an agreed period of time. The interest rate is usually fixed, and there may be a fee charged for arranging the loan, which itself can be added to the loan. Unsecured loans are available from banks, specialist business lenders, peer-to-peer lenders, angel investors or through government loans.
Types of Business Loans
There are many different types of loan to choose from: small business loans, business cash advance, start-up loans, business acquisition loans, working capital loans, peer-to-peer loans, mezzanine loans, property development loans and more, some different in name only. All of them fall into two categories, either secured or unsecured.
Unsecured or Secured; What’s the Difference?
For both secured and unsecured business loans the interest rate and the repayment amount is fixed for the term of the loan. An unsecured loan isn’t tied to an any security like an asset whereas a secured loan relies entirely on this asset as collateral.
An unsecured loan will usually have a higher interest rate than a secured loan reflecting the greater risk extended by the lender to the borrower, however this might not always be the case depending on your creditworthiness.
What Isn’t an Unsecured Business Loan?
Sometimes it’s easier to understand what doesn’t constitute an unsecured loan:
- Vehicles Loans – including cars and vans which the lender can then take back when you fail to pay.
- Business Mortgages – A loan allowing you to buy your business premises which can be re-possessed by the lender when you can’t keep up with repayments.
Why Choose Unsecured Business Loans?
It can be a very flexible finance option suitable for a range of purposes, including:
- Working capital to increase or manage your cash flow
- Purchasing a new asset (including vehicles, plant and equipment)
- Expanding your premises or business
The Benefits of Unsecured Loans
The main advantage of unsecured business loans are that there is no need to put up any of your business’s – or your – assets. In the event of your business being unable to to make repayments on the loan, the lender doesn’t have any claim over either the business’s or your property. But there are also other advantages to utilising an unsecured loan:
Higher loan amounts – While this might not seem logical, unsecured business funding doesn’t have an upper limit to it; secured funding is limited to the value of the assets secured to it. Unsecured loans don’t have this limitation, although the cost (interest rates) and repayment schedule will reflect larger loan amounts.
Easier to access – With less paperwork being required to value and assess assets, unsecured loans can be easier and quicker to get. It usually involves less documentation which can delay the acceptance of a loan application.
Additional flexibility – Having extra cash on hand and ready to use whenever you need it is great for when you need to purchase new IT software, a new hire, or need working capital, especially when it isn’t secured against your existing assets.
Building relationships – Obtaining an unsecured loan from a lender can help establish a relationship with a lender. This can help you further down the line when you need additional credit and you’ve already proven yourself and your business to be reliable.
The Downside to Unsecured Loans
There are obviously some cons to unsecured loans too. If you don’t read your terms carefully and fail to live up to the expectations of the lender then you can end up hurting your business’s reputation, financial stability and ability to get further funding:
Your liability – While not held against assets, it still means you have to repay it back each month without fail. You won’t get many second chances to pay, if at all, if you miss a repayment.
Additional costs – An unsecured loan is secured by trust; it is a much bigger risk for the lender. This means that there will be higher costs associated with this type of borrowing. Although how much more expensive it is will depend on how good your credit rating and end of year accounts are.
Building a bad reputation – Maintaining good repayments can enhance your reputation with lenders but the opposite is also true. Not managing your loan and your repayments effectively can cause irrevocable harm in your relationship with your lender. It can make it more difficult to obtain credit lines in the future.
Flexibility – Yes, flexibility can be both a benefit and hinderance. While the influx of a cash boost can do just that to your business, it also means committing to pay it back over an agreed time which could be as short as a year or longer (1-5 years). Shorter terms mean higher monthly repayments, which can significantly hinder your business cash flows.
Unsecured doesn’t mean you don’t have to pay – Just because the loan is unsecured, it doesn’t mean that the lender won’t attempt to collect if your business defaults on the loan either. If they feel it worthwhile, they might still attempt to come after you and your assets via the courts.
What Happens When You Can’t Pay Your Unsecured Loan?
At best if you don’t make payments it might damage your credit rating but it can get worse:
- Additional charges are added
- Credit rating is affected
- Lender goes to court
- A CCJ is issued
- A charging order is applied for against your property.
Am I Eligible for an Unsecured Business Loan?
Your application will be based on your company’s business rating, your personal credit rating and on the merits and strength of your loan application.
The lender will assess how much of a risk is involved in lending you money; however this risk is often realised in the terms and conditions (interest rate and repayment terms) of your business loan. For instance a healthy company with a large balance sheet showing good profits will be offered more attractive rates and repayment terms than a business that cannot demonstrate a healthy balance sheet or a full order book.
Every lender or institution will have their own lending criteria. It could be a trading history covering one, two or five years, or it could be a certain number of filed accounts.
Where to Get Unsecured Business Loans
Unsecured business loans have seen a rise in popularity at a time when more lending products than ever are available to businesses.
Unsecured loans from the bank
Look online and you’ll find some of the best unsecured loan rates still come from the high street. Since the credit worries of 2008 banks have created stricter lending criteria. So while they can offer some of the best unsecured products, they’ll be looking for increased amounts of credit checking and financial health reports.
Unsecured loans from alternative lenders
Because of the difficulty in getting loan applications through the banks, a number of alternative lenders have entered the market. Alternative lenders have plugged the gap left by high street banking institutions with their palimpsest loan applications usually ending in red-stamped rejection.
Alternative lenders offer smarter solutions to lending; they analyse your business data and can approve loan applications within hours. This can mean a capital boost that helps your business in a timely, rather than drawn out, fashion.
Unsecured loans from the government
For a business with plenty of time on its hands unsecured business loans are available from the British Business Bank to help with both start-ups and growth funding.
Unsecured loans from peer-to-peer lenders
There is a growing range of unsecured loans available from peer-to-peer lenders that can offer rates and terms equal to that of the high street lenders. While there may be other fees attached to the loan, they are often quicker to arrange and use different qualifying criteria to that of the banks.
There are plenty of lending options to consider, which one you choose must match the requirements of your business, but importantly you must be able to repay it. Choose wrong and it can fatally affect your business
There are obviously alternatives to using unsecured business loans including a business overdraft, credit cards and loans with a director’s guarantee (which carries a high level of personal risk) or putting up a certain amount of security from an existing asset and gaining a standard secured business loan.
If you are looking to fund your business growth through unsecured business loans, Access Commercial Finance can help you find funding up to £200,000. Call us and talk to one of our experts today on 03330 069 141.