Unsecured Business Loan overview
What is an unsecured business loan?
Unsecured business loans are loans provided for a fixed time period that are not backed by a property, equipment or other form of collateral. As a result of not requiring any collateral, unsecured term loans are often supported by business cash flows in combination with the borrower’s creditworthiness. This means that for an unsecured business loan, the financial health of your business and your credit rating will have a larger impact on any approval outcome relative to a secured business loan.
Unsecured business loans are short term by nature. Depending on the lender, unsecured business loans can be provided for anywhere from 3 months to 3 years, however some of our peer-to-business lenders can provide an unsecured business loan for up to 5 years.
The key feature of an unsecured business loan is that they do not require any collateral – i.e., no one can make a claim on an asset of the business if repayments can't be made. This makes the loan more risky when compared to a secured business loan and as a result lenders will charge a higher interest rate and provide the funds for a shorter amount of time.
Benefits of an unsecured business loan
An unsecured business loan allows a business to gain quicker access to cash compared to other business loan products and is a great alternative if you do not want to put up any of your personal or business assets as collateral.\n\nIf your business defaults on an unsecured business loan, the lender won’t be able to seize any of your personal or business assets like they could when defaulting on a secured business loan. The only exception to this is if you have provided a director’s guarantee as a part of the unsecured business loan — if this is the case then your business assets will still be safe, but you as a director will become financially liable for covering any default made by the business — more on this in a bit!
Drawbacks of an unsecured business loan
Given collateral is not required, unsecured business loans are generally a riskier type of loan to give for lenders. To compensate them for the additional risk of default relative to a secured term loan, unsecured term loan lenders will often charge a higher interest rate and provide the loan for a shorter time period.
When applying for an unsecured business loan, the cash flow health and creditworthiness of your business will have a much higher impact on the approval of any application. Lenders will therefore require a more information and understanding about the business before they can make a decision when compared to a secured business loan.
Applying for an unsecured business loan
In order to provide approval for an unsecured business loan, lenders will need to be comfortable that your business will be able to support any required loan repayments.
In order for lenders to assess the stability and risk of your business, they will often require you to provide a combination the below as part of an application for an unsecured business loan:
- Business financial statements
- Business tax returns & statements
- Business bank account statements
As a part of the application for an unsecured business loan, you may be asked to provide a ‘director’s guarantee’. This means that you as a director, are ‘guaranteeing’ that the loan will be paid back and that if the loan can’t be paid back and goes into default, that you will be personally financially liable to have the loan repaid. This could potentially involve the lender seizing personal assets to recover the value of the loan.
What is an unsecured business loan best used for?
Due to the short life-span of an unsecured business loan, they are best suited to aiding short-term working capital needs rather than funding large, lengthy business projects. As an example, they are a fantastic way to give your business some temporary breathing room when paying wages or suppliers.
Unsecured business loans also provide a great quick cash-boost to allow you to take advantage of and kickstart potential growth opportunities for your business. A great example of this is if there is an opportunity where you know some additional marketing spend would result in an increase in sales but you don’t have the cash for it — an unsecured business loan would be a perfect way to raise the funds to undertake the marketing and grow your business.