August 12, 2022

What is Unsecured Business Finance

Whether your business is a start up or an established trading business then you have almost certainly considered a business loan, possibly to purchase new equipment, expand business operations or investing in the businesses growth plans. The most common type of business loan for SME’s is an Unsecured Business Loan.

Unsecured Business Loan: This type of loan doesn’t require any collateral to secure the loan, for example, the business doesn’t need to provide collateral against property, inventory or tangible business assets. Therefore enabling businesses with limited tangible assets access to finance. 

Unsecured versus Secured loans 

  • Collateral: The primary difference between unsecured loans and secured loans is the level of collateral required. Secured loans require tangible assets as security such as a property, whereas unsecured loans don’t require any asset security. In most instances unsecured business loans only require a personal guarantee from the business owner. (maybe include we will discuss Personal Guarantees later in the article etc?) 
  • Speed: The secondary difference is the time it takes to arrange an unsecured loan versus a secured business loan. With an unsecured loan the lender doesn’t need to value or review any assets to approve a loan application. Compared with secured business loans, the lender has to value, review and undertake a legal process to obtain security over the asset. Typically unsecured business loans can be completed in 3 -5 working days, compared to secured loans which can take between 1-3 months. 
  • Cost: Typically secured loans come with cheaper interest rates than unsecured loans as the lenders risk is lower due to the level of security taken. However, secured loans come with other associated costs such as valuation and legal fees. 

Key Features of Unsecured Business Loans:

  • Repayment Profile: Typically between 6 – 60 months with fixed monthly or weekly repayments. 
  • Loan Amounts: Naturally unsecured loans lend themselves to smaller loan amounts as there is no collateral to guarantee the loan, therefore they carry higher risk for the lender. The loan amounts are typically between £5,000 to £500,000  
  • Fixed interest rates: Most unsecured business loan providers offer fixed term interest rates, this allows the business to fix the cost for the term of the loan. 
  • Security: Most unsecured business loan providers require the shareholders/directors of the business to sign a Personal Guarantee, rather than providing asset collateral. 
  • Early repayment charges: Usually there are no early repayment charges to exit an unsecured business loan early. However this does change depending on the lender and the businesses profile. 

What are the Advantages of Unsecured Business Loans?

  • Flexibility: Business loans can be used for a variety of purposes. For example, marketing expenses, purchase new business equipment or taking on new staff members. Most unsecured loan providers will allow the business to choose the repayment profile, such as 24 months or 60 months depending on affordability.  
  • Fast and Simple: Unsecured business loan applications are typically quicker and easier than other business finance applications. Usually there is less financial information required, this is because the lender doesn’t have to value any assets in addition to the businesses financial information. 
  • No Assets Required: The business or the directors aren’t required to give any assets as security for the loan. This allows a large range of businesses in various sectors access to finance 

What are the Disadvantages of Unsecured Business Loans?

  • Interest Rates: Unsecured interest rates are typically higher than secured business finance products. However most lenders offer risk based pricing, therefore if the businesses credit score and financials are strong the interest rate can be competitive amongst secured finance offerings. 
  • Loan Amounts and Terms: As unsecured loans don’t require any collateral the loan amounts are typically smaller, with the loan term being capped at around five years. In comparison secured business loans are often used for larger loan amount over longer terms. 
  • Qualification: Without collateral lenders often rely heavily on the financials and creditworthiness of the business. Therefore if the business is loss making or the business owner has adverse personal credit it might be harder to access unsecured finance. 

What Documents Do You Need for an Unsecured Business Loan?

When considering applying for an unsecured business loan, there are specific documents that you will need to provide: 

  • Financial accounts 
  • Business Plan and Forecasts 
  • Business Bank Statements 
  • Detailed loan purpose 
  • Summary of any debt already taken out by the business 
  • Director and Shareholder details 
  • Information on any adverse personal or business credit history

Provide’s platform will connect you with over 200 lends to find the best match for your loan criteria. Our team of financial experts will go over your options for Unsecured Business finance with you, to make sure you are choosing the lender that makes you the most comfortable with this process.

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