Read on to discover everything you need to know about unsecured loans for business growth.
What is an Unsecured Business Loan?
Whereas traditional business loans are always secured against assets, unsecured business loans can be arranged without the need for collateral such as property or equipment.
This makes it a fast, flexible form of business funding which fits the bill for businesses who don’t own many assets, or where the assets may already be secured against finance.
They are short or medium term loans which required a good credit rating from the borrower to obtain.
|Lender||Minimum Loan Amount||Maximum Loan Amount|
|Bank of Scotland||£1000||£50,000|
|Bank of Ireland||£1000||£25,000|
|Capital on Tap||£1000||£50,000|
How Do Unsecured Loans Work?
Obtaining unsecured business loan offers is straightforward and relatively fast. Firstly, you submit your loan application to the business loan provider of your choice, or to a comparison service who can offer you a range of options.
Based on perceived risk, loan amounts and duration, they will offer you loan terms which include an interest rate and and a proposed offer.
These interest rates may be fixed or flexible depending on the particular lender. Obviously, fixed rate loans offer more stability as you calculate your ability to repay the loan over time.
It’s vital that you spend as much time necessary considering the offer you are made, and reading any fine print within the contact. Ensure there are no hidden costs, fees or charges, or clauses which may make the loan less appealing than it first seems. Watch out for early repayment fees also.
Once you’ve completed your due diligence and decided to sign the paperwork, you could expect to receive your funds in as little as 48 hours.
- No Asset Security Required
- Repay after a month or 5 years
- Easy to arrange with minimal admin
- Funds are released quickly to improve cash flow
- Unsecured loans are usually dischargeable in insolvency, unlike secured ones
- A reusable source of funding
- Flexible repayment terms
Can I get a Business Loan Without Security?
Almost all lenders will ask for a personal guarantee when offering a loan without security. These documents mean that, should the loan repayments be defaulted on for any reason, the lender has a level of risk protection in place.
Personal Guarantee Clauses
Personal guarantee documents, typically signed by company directors, will place a personal asset as security for a business loan in the event of default.
It’s somewhat paradoxical that even so-called ‘unsecured’ loans require these, since they are themselves a form of security.
They should never be signed lightly, since these legal documents are specifically designed to breach the corporate veil.
Where personal guarantees are required, we always recommend the use of personal guarantee insurance policies. These can be paid by the company and offer a powerful level of reassurance for directors who have put their family homes on the line for the sake of business growth.
Eligibility and Criteria
While every lender has a slightly different criteria, the basic requirements are as follows:
- Trading for at least 4 months
- UK Bank account
- Sole Trader, LTD Company or Limited Liability Partnership (LLP) registered in the UK
- Minimal Annual Turnover of £10k
What if We Have Bad Credit?
Obtaining an unsecured loan with bad credit is difficult, since the lender must assess risk before agreeing funds.
Where your business’s credit history indicates high risk, it may still be possible to agree a loan but the amount will be lower and the interest likely higher as a result. Good credit is always a precursor to being able to secure higher levels of funding.
There are lenders out there who specialise in higher risk lending so it’s certainly possible, assuming a personal guarantee can be offered.
As long as the lender perceives the loan repayments to be affordable, a range of finance options do exist so contact us to find out more about the right provider for your business needs.
What are the Average Interest Rates?
Interest Rates will fluctuate widely depending on:
- the amount of the loan
- your company credit score
- Your business history, how long you’ve been trading and overall reputation
Rates range from around 1.3% APR.
Enterprise Finance Guarantee Loans
For companies with no proven track record or who have been turned down for other forms of business finance due to poor credit, the British business bank backed Enterprise Finance Guarantee may be the ideal way to get your foot on the finance ladder.
With EFG backed finance, the government essentially agrees to take on primary responsibility for loans which default, thereby offering heavily reduced risk to lenders. Eligibility for EFG loans rests solely with the provider, however, who would be following governmental criteria.
EFG scheme loans mean the borrower pays fees to the lender exactly as usual, as well as a quarterly fee to the government. This extra fee can mean this type of finance is more expensive than some other loans, but since it makes loans available to businesses who wouldn’t otherwise have qualified it is a popular option for many.
Compare Business Loans and Find the Best Unsecured Finance Quote
It isn’t quite as simple, however, as saying that the lowest business loans rate equals the best deal for any company. In some cases, slightly higher interest rates may actually mean a far better overall deal.
We’ve found that a wide range of factors combine to mean that each business situation will have its own best match with a particular provider.
Contributory factors include:
- Amount of Paperwork
- Responsiveness of lender
- Speed of Payment – many promise ‘within 48 hours’ but do they actually deliver?
- Charges, Rates and Fees
- Business Sector
- Do they Offer Flexible Repayment Terms?
- Are there penalties for early repayment?
Unsecured Business Loans for Startups
Startups at generally in a difficult category for finance. Without a trading history or assets, many struggle to find the finance necessary to catalyse growth.
For smaller amounts (£25k or less) the government’s startup loan scheme is worth investigating.
For larger amounts the presence of a director’s personal guarantee is essential but in these cases it is possible to find good deals on loans of up to 150k. Contact us for details.
In all cases, a carefully prepared business plan, clean personal credit score, and income projects will be a necessity.
Since even ‘unsecured’ business loans require a personal guarantee, there is substantial risk in taking out a loan, as with any form of finance. Defaulting on the loan will cause the lenders to call in the guarantee, so you need to be sure you can pay the loan back before securing the finance. Read more on the Business Expert website.
Practically speaking, it is impossible to borrow money from any private lender without offering them some kind of security. The government start up loans scheme does offer finance of up to 25k, without guarantee, providing their other criteria are met.