As a business, capital is vital for expanding your operations. However, traditional secured loans lock you into a long repayment period with high interest rates and fixed repayments. Choosing an unsecured business loan offers increased flexibility.
What is an Unsecured Business Loan?
Most business loans are secured; the borrowing company puts up their valuable assets as collateral for the loaned sum. If the company cannot repay, the lender can claim the property to minimise its losses.
Unsecured business loans do not require assets as security. Instead, the lender may require a personal guarantee from the company’s directors, making them liable to pay if the business fails.
Who Can Benefit from Unsecured Business Loans?
Unsecured business loans are best suited to small or mid-sized businesses that do not have the valuable assets required to secure a traditional business loan.
Lenders rarely perform credit score checks for this financing. Instead, providers often assess your business transactions for the past year. Hence, unsecured loans can help businesses with poor credit history.
How Do I Qualify?
Although their specific benchmarks vary, most loan providers ask you to meet the following criteria:
- Be a business registered in the UK
- Have been operating for at least six months
- Have a monthly turnover of over £5,000
You also need to provide records of your business transactions for the last six months for the lender to determine how much you can borrow. Then, they may ask for a business plan detailing how you will use the unsecured loan and a personal guarantee from the business directors.
How Unsecured Business Loans Work
Different types of loans have differing terms and structures. However, unsecured loans do not collateral property. When a company needs capital, they can apply for a loan without risking their assets. The lender may require the business’s directors to provide a personal guarantee, making them liable to pay if the company cannot.
The loans also typically have short repayment periods of six to ten months, depending on your business’s circumstances and turnover. For example, with a merchant cash advance, your repayments are directly influenced by the amount you made from credit and debit card transactions that month.
The Different Types of Unsecured Business Loans
You can choose from four main types of unsecured business loans, each with differing terms and advantages.
1. Merchant Cash Advance
Merchant cash advances offer small loan amounts with repayments determined by your credit card and debit card transactions. When they are lower than usual for a month, your repayments decrease.
Typically, businesses use them for:
- Upgrading their technology and systems
- Purchasing new stock
- Repairing facilities and equipment
- Investing in new processes
2. Business Overdraft
Most business bank accounts have an arranged overdraft, usually ranging from £500 to £50,000, although you may be able to negotiate new limits with your provider. You can spend up to the overdraft limit and repay the amount plus interest.
However, overdraft interest rates are often very high, and your repayments can quickly grow if you do not repay quickly. Hence, businesses typically use their overdraft for small, short-term payments, including:
- Unexpected bills
- One-off purchases
- Cash flow problems
3. Business Credit Cards
Like individuals, businesses can take out credit cards, allowing them to borrow credit to make purchases. Then, they pay off the sum after receiving the bill. After the bill is delivered, the outstanding sum accrues interest.
Typically, businesses use credit cards to:
- Pay daily expenses
- Pay for employee entertainment
- Pay unexpected or emergency bills
4. Revolving Credit Facility
A revolving credit facility is a flexible borrowing option that allows you to take out and repay credit repeatedly. Your business will receive a credit limit that you can take credit out up to and then repay plus interest. Once repaid, you can access the entire credit limit and borrow again.
Businesses use revolving credit facilities to:
- Manage their cash flow
- Pay unexpected bills
- Develop and offer new services or products
- Purchase new stock
- Recruit or train staff
What Are the Advantages of Unsecured Business Loans?
Unsecured business loans offer you capital without the risk of losing your company’s assets, often making them a safer and more accessible alternative to traditional business financing. For example, merchant cash advances offer a flexible repayment system that depends on your business turnover. That way, hard times do not place your business at risk, and you can use your assets in other ways.
What’s more, the application process is typically shorter; many lenders can transfer the loan amount into your business bank account in two days, providing almost immediate capital. It means that you can quickly resolve cash flow issues.
Get an Unsecured Business Loan Today
If your business needs extra capital quickly, we offer a range of flexible financing options. Whether you want the flexible repayments of a merchant cash advance or auction finance to take short-term opportunities, we can help.
Speak to our lending experts today to learn about our loans and find the ideal choice for your business.
FAQ
What are the main benefits provided by unsecured business loans?
Unsecured business loans are more suitable for small businesses without valuable assets or a reputable credit history. You can receive the capital within a couple of days through a short application process, and your repayments often depend on your monthly business turnover.
What can I use an unsecured business loan for?
You can use an unsecured business loan for any business investment, such as purchasing new premises or technology, hiring new employees or launching new products.
Can I get an unsecured business loan if my company has bad credit?
Yes. Typically, unsecured business loan application processes do not include credit score checks, making them ideal for companies without a strong credit history.
What are the most common application criteria for an unsecured business loan?
Typically, lenders want your business to have been registered in the UK for at least six months and have an average monthly turnover of at least £5,000. They may ask to see your recent business transactions and a viable business plan.
What is a personal guarantee?
A personal guarantee is a commitment made by an individual to repay a loan if the borrower cannot. Many unsecured business loans require a personal guarantee from a director.
Can I get an unsecured business loan without a personal guarantee?
Yes. Your loan terms and requirements depend on your business and transactions, and you may not need a personal guarantee.
How do unsecured business loans work?
Unsecured business loans are borrowed sums that are not secured against your company’s property. Then, you repay the sum plus interest. Many lenders will ask your directors to provide a personal guarantee.
How much capital can I borrow with an unsecured business loan?
The amount of capital you can borrow depends on your monthly business turnover. The higher the turnover, the more you can borrow.
What are the interest rates on business cash advances?
Business cash advances, also known as merchant cash advances do not accrue interest.
How long does it take to repay a cash advance?
Cash advance repayment periods depend on your credit and debit card transactions. The more turnover your business makes, the higher your payments and the shorter your repayment period.
