What are unsecured business loans?
An unsecured loan is a type of borrowing where you don’t need to provide any assets as collateral. Unlike secured loans, which are tied to property or equipment, unsecured lending relies on the borrower’s creditworthiness and financial health. This means if your business doesn’t have valuable assets to back a loan, you can still access funding.
They’re perfect for businesses and entrepreneurs who need flexibility without locking up their valuable assets but keep in mind the higher interest rates are the trade-off.
How do unsecured loans work?
Unsecured loans function differently from secured loans. There’s no need for the borrower to put up any assets as security – instead, the lender assesses your business’s creditworthiness and revenue streams. But you might ask, what’s the catch? Well, with no collateral, lenders take on more risk, which often translates into higher interest rates or shorter repayment terms.
For instance, if you run a small e-commerce store and need funds to scale, an unsecured loan in the UK could help bridge the gap quickly but without risking your property. The approval process is usually faster too, as there’s no need to evaluate assets like real estate.
But remember, your eligibility for these loans is primarily based on your credit history, annual turnover and ability to repay.
Do you need a Merchant Cash Advance?
Types of unsecured loans available
Unsecured business loans in the UK come in various forms, giving you plenty of options depending on your business needs.
1. Term loans
Term loans offer a lump sum of money that’s repaid over a fixed period, typically a set interest rate. This option suits businesses with clear plans for how they’ll use the money, like expanding operations or purchasing new equipment.
- Example: A restaurant owner might use a term loan to refurbish their dining area, knowing the exact amount they’ll pay each month.
2. Lines of credit
A line of credit works like a credit card – you’re given a maximum limit, and you can draw from it whenever needed. You only pay interest on what you borrow. This flexibility is ideal for businesses dealing with fluctuating cash flows, such as seasonal retailers. It’s like having a financial cushion for unexpected expenses
- Example: A florist might use a line of credit to purchase additional stock during high-demand periods like Valentine’s Day, without taking out a fixed loan.
3. Merchant cash advances
A merchant cash advance allows businesses to borrow against future credit card sales. It’s a popular option for businesses with daily card transactions, such as cafes or retail shops. Compared to a business loan with fixed monthly instalments, a percentage of your daily/weekly sales is automatically deducted to repay the MCA.
You can even get an MCA with a bad credit score because lenders are more focused on your sales and revenue.
- Example: A shoe retail store might use an MCA to stock up on inventory before a busy holiday season.
4. Invoice financing
With invoice financing, businesses receive an advance on unpaid invoices. This type of unsecured debt allows you to access cash flow without waiting for customers to settle their accounts. It’s a great solution for businesses dealing with late-paying clients to ensure the smooth running of operations.
- Example: A marketing agency with several outstanding invoices might turn to invoice financing to get cash against their invoices in order to meet payroll.
5. Business credit cards
While not often thought of as loans, business credit cards provide short-term, flexible financing. They’re easy to access and manage, especially for businesses looking for smaller amounts of money to cover everyday expenses.
- Example: A small bakery might use a business credit card to cover regular purchases like ingredients or packaging.
Benefits of unsecured loans
1. No need for collateral
One of the biggest perks of an unsecured loan is the lack of collateral requirements – no property, no vehicles, no personal guarantees (some providers might need one, though). For many businesses, that’s a weight off their shoulders.
2. Faster approval process
Without the need to evaluate assets, unsecured lending often comes with a much quicker approval process. This means you can secure funding in days rather than weeks, a huge advantage when you need cash fast.
3. Flexibility in use
Unlike some business loans where lenders may dictate how the funds are used, unsecured loans give you the freedom to allocate the funds where they’re most needed – be it expansion, marketing or covering sudden operational costs.
Disadvantages of unsecured loans
1. Higher interest rates
The flip side of having no collateral is that lenders take on more risk. And with higher risk comes higher interest rates. This could potentially disturb your personal finances if you don’t use the funds efficiently.
2. Strict eligibility requirements
While unsecured loans don’t require assets, they do rely heavily on creditworthiness. Lenders will look at your credit score and revenue streams closely for specific types of unsecured loans.
The comparison table summarizes this:
| Advantages | Disadvantages |
|---|---|
|
No collateral needed – Borrow without risking business assets. |
Higher interest rates – No collateral increases lender risk, leading to higher costs. |
|
Faster approval process – Without asset evaluation, loans are processed quickly. |
Strict eligibility – High credit score and good financials required. |
|
Flexible use of funds – Use the loan for any business need. |
|
How to apply for an unsecured business loan?
Here’s a step-by-step guide to ensure the application process is smooth.
1. Research lenders
Start by choosing the type of unsecured loan (MCA, for example) and research the lenders offering that service. Not all lenders offer the same terms, so it’s crucial to compare interest rates, repayment terms and loan amounts. Are you looking for flexibility or the best interest rates? Different lenders cater to different needs.
2. Gather required documents
To apply, you’ll typically need to provide documents like financial statements, bank records and tax returns. These help lenders look at your business’s capability to repay the loans. Some lenders may also require personal guarantees, so be prepared.
3. Submit your application
Be sure to double-check all your information. Some lenders offer online applications, which makes the process even easier and faster. With no security involved, expect a quicker decision compared to traditional loans.
4. Review loan terms
Before accepting any loan offer, review the terms carefully.
- What are the interest rates?
- Are there any hidden fees?
Make sure the repayment schedule fits your cash flow to avoid financial strain down the line.
Explore A Popular Type of Unsecured Loan: Merchant Cash Advance in The UK With ComparedBusiness
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FAQs
If you don’t have collateral, consider applying for an unsecured business loan. These loans don’t require assets but rely on your credit score, business plan and projected revenue. Lenders look at your financial history and future sales potential to assess associated risk.
To get approved for an unsecured business loan, you’ll need a good credit score (for some types), proof of steady revenue, documents like tax returns and business registration, and a strong business plan. Lenders will evaluate your financial health and ability to repay the loan.
While some unsecured loans do require a personal guarantee, there are lenders who offer loans without one. However, these loans might come with higher interest rates or stricter terms due to the increased risk for lenders.
Defaulting on an unsecured loan can lead to legal action, credit damage and difficulty securing future loans. Some lenders might pursue repayment through the UK’s court and your business or personal assets could be affected. Therefore, always communicate with your lender to explain all terms.
