The complete guide to unsecured business loans

When it comes to accessing finance to fund your growing business, it can be difficult to know which option is best. From business credit cards and asset finance to invoice finance and loans, you might wonder what’s the best fit for you and your business. An unsecured loan could be a good starting point as it poses less risk to your business’s assets. Let’s explore this type of borrowing in more detail.

Key takeaways

An unsecured business loan usually ensures:

• You don’t need an asset – the lender doesn’t require collateral, such as property or equipment owned by the business, for security

• A faster application process – with no asset to value, the process is usually quicker

• Higher interest rates and smaller loan amounts – lenders typically charge higher interest rates and lend less to mitigate the risk of no security on the loan

What is an unsecured business loan?

An unsecured business loan is a way of accessing finance for your business without needing to secure the borrowing against an asset – such as equipment or property – as part of the application process. 

Unlike secured business loans, which require you to put something up as collateral, or startup business loans, which require your business to have been trading for less than 36 months, unsecured business loans often provide a more straightforward borrowing option. They often have a quicker application process, too, meaning you may be able to get the funds sooner. 

How do unsecured business loans work

Like personal loans and business loans, an unsecured loan for business is a sum of money you borrow from a lender that’s paid back in instalments, with interest, over a set period of time. In this sense, it works in the same way as many other business loans.

You typically request a certain amount of money and agree on the length of time over which you’d like to pay it back. Because the loan is for your business, the funds – or capital – you must use it for business purposes. 

Because you aren’t securing the loan with an asset, you need to satisfy your lender that you and/or your business can afford to repay the loan. During the application process, the lender typically asks to see business statements, tax returns and balance sheets. It also runs a credit check on you, your business or both, depending on how long your business has been trading.

Unsecured vs secured business loans

There are several differences between unsecured and secured business loans. Here are the most common ones:

Advantages and disadvantages of unsecured loans

Any type of business loan has advantages and disadvantages. Here are the pros and cons of unsecured business loans. 

Advantages

• You don’t require collateral, which makes it a more attractive option if you don’t have assets to offer up

• Faster and simpler application process. With no assets for the lender to value, the process can be quicker and easier – ideal if you need the funds quickly 

• Increased flexibility. As long as the funds are going towards your business needs, you can usually use them without restriction

• Less risk to your assets. As you aren’t putting up an asset as collateral, there’s less direct risk of your business’s assets being seized in the event you default on the loan

Disadvantages

• Higher interest rates. You can usually expect to pay higher interest rates on the loan to offset the lender’s risk. You can read about average interest rates here

• Smaller loans. Unsecured loans allow you to borrow less money in general. This  might make it unsuitable if you’re looking for larger sums

• Stricter eligibility criteria. As you don’t need to secure the loan with an asset, lenders usually want to see a good credit history and a strong financial outlook

• Shorter terms. It’s likely that you’ll need to repay the loan more quickly than with other types of borrowing, which can put pressure on monthly cash flow

Is my business eligible for an unsecured loan?

The eligibility criteria to get an unsecured business loan can differ depending on the lender and their specific requirements. However, there are some common criteria you need to meet if you want to be sure that you’re eligible for an unsecured business loan. For instance, your lender is likely ask for evidence of:

• Your age – you most likely need to be 18 or over

• How long your business has been trading

• Your business’s location – this generally needs to be the UK

• Your role in the business, such as whether you’re a director, owner or partner

This isn’t an exhaustive list so it’s best to have as much information and documentation to hand as possible before starting the application process.

How much can you borrow with an unsecured loan?

The amount you can borrow with an unsecured business loan depends on a range of factors. These include your business and personal circumstances, credit history, cash flow loan purpose and the lender’s lending policy.

Some lenders, for example, may lend up to a percentage of your business’s annual revenue. Other lenders may have a range of amounts you can borrow.

As a general ballpark range, you may find you can borrow up to £500,000 with an unsecured loan. But that doesn't mean lenders will offer all businesses such an amount – some lenders may offer you more or less depending on your specific circumstances.

What can you use an unsecured loan for?

Small businesses may require an unsecured loan for a range of reasons, and so long as you use the loan for your business – you can use it to pay for pretty much anything. Here are some examples:

• Day-to-day expenses. A loan can help improve cash flow to fund operational costs, such as rent, bills or paying employees

• Advertising. This covers all types of publicity, from online ads to marketing campaigns

• Stock. You can use a loan to purchase any materials and/or products needed for your business

• Equipment. The funds can also go towards new tools, tech or machinery. You can also use the loan to pay for repairs or upgrades

• Development and expansion. If you need to move to bigger premises or you want to explore new products or markets, a loan could help get you started

• Debt refinancing. If you have lots of smaller types of borrowing across credit cards and overdrafts, then a loan can simplify repayments – just make sure you aren’t paying more in interest with a loan than you would otherwise

• Buying a business. If you’re an entrepreneur looking for a business monopoly, you could use a loan to buy a business

Types of unsecured business loans

An unsecured loan isn’t the only way to get funding for your small business. Let’s take a look at some of the other types of loans and unsecured borrowing available.

Business credit cards

A business credit card is much like a personal credit card – you get a spending limit and the lender charges interest on any outstanding balance. Business credit cards can be helpful for employee expenses as you can have multiple cards to distribute among your staff. Cards are useful for managing cash flow and getting rewards, such as air miles or cashback on your spending. 

Overdrafts

A business overdraft generally refers to a type of borrowing offered through your business bank account. If your application is approved, your lender agrees to an amount that you can draw upon over and above what is in your balance. Overdrafts can be helpful if cash flow is tight, but they can be expensive and aren’t ideal for long-term or consistent borrowing.

Startup loans

A startup loan is usually unsecured and only available to businesses that have been trading for less than 36 months. They usually come with higher interest rates and less favourable terms due to the element of risk the lender has to accept when offering credit to startup businesses. 

Invoice finance

Invoice finance allows you to receive money from unpaid invoices before your client or customer has settled the invoice directly. A lender usually pays a certain percentage of the outstanding invoice(s) and then take their fee when the client eventally pays the invoice. 

Revolving credit facility

Similar to a credit card, a revolving credit facility gives you a pre-set credit limit you can use as and when needed. As with a credit card, the lender charges less interest if you repay in good time. 

Peer to peer (P2P) lending

If you’re looking to borrow from less traditional lending institutions then P2P could be an option. Typically managed through an online platform, P2P lending allows you to borrow from individual investors. You’ll need a solid business plan to catch the eye of potential investors, but usually this form of borrowing doesn’t require collateral.

What you need to know before applying

Before applying for an unsecured business loan, here’s a handy checklist of things to think about. Remember, the more information you have to hand for the application process, the better your chances of being approved. 

• Eligibility – check you understand what the lender’s eligibility requirements are

• Credit score – is your credit score as good as it could be? Take the time to improve it first if necessary

• Terms – are you happy with the terms of the loan, including the interest rate, monthly repayments and the term of the loan?

• Other considerations – check if the lender has any other requirements. For instance, you may need to find a personal guarantee before applying.

Paying back your unsecured business loan

Repaying your unsecured loan should be relatively straightforward. Usually, you set up a Direct Debit during the application process or when the lender approves your loan. This ensures that you never miss a loan repayment. After that, you typically make repayments on a monthly basis, details of which are set out in your loan agreement.

You may be able to repay the loan early, but you may face early repayment charges. If you think you may want to pay your loan off early, be sure to check during the application process whether the lender applies early exit fees.