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What Is an Unsecured Business Loan?

25 September 2023

An unsecured business loan is a type of finance that allows business owners, sole traders, or limited companies to access a loan without providing collateral as security. The main advantage of an unsecured loan is that your business or personal assets are not in danger if you fail to repay the loan.

Businesses will often seek business loans to improve their working capital or help them run their business more efficiently. An unsecured loan is usually the preferred option as the risk in losing assets to a secured business loan is too great for many businesses, especially SMEs.

In this article, we will cover:

What is the difference between a secured and unsecured loan?

A secured loan is a loan that requires collateral as financial security. The collateral is the company’s asset(s), which can range from properties, vehicles, machinery, or stocks. Having collateral in a secured business loan reassures the lender because they receive the asset in return if there is a failure to repay the loan.

An unsecured loan does not need collateral to be granted. However, the lender may assess the borrower’s creditworthiness as an indication of whether they can repay the loan. As with any loan, the credit checks involved would typically include bank statements, overdrafts, and credit card payments.

Types of unsecured business loans

There are different ways unsecured business finance can be obtained.

These include:

  • Term loan: a loan that is borrowed for an agreed length of time.
  • Working capital loan: used to maintain day-to-day business costs, approved by creditworthiness and repayment history.
  • Government schemes: a loan supplied by the government to small business owners with a lower interest rate.
  • Merchant cash advance: to be repaid as a percentage of your sales. Your business repays what it is able to afford, often in the form of a fixed percentage rate.
  • Revolving credit: a very flexible option for your business. You are able to use the loan to withdraw, spend, and repay, as and when required. The amount you borrow will depend on the business size and credit history and is beneficial to businesses that might encounter fluctuations in cash flow.
  • Business overdraft: often used for small expenses, interest is charged on the amount that is overdrawn.
  • Business credit cards: security through a credit card to be used for frequent expenses. The offer can range from £1,000-£10,000, however, interest rates can be exceptionally high.
  • Microloans: a loan given for a short-term expense.
  • Consolidation loan: combines multiple debts into a single loan, making it easier to make the repayments, and potentially lower the interest rate.

These are the most common types of unsecured business finance. However, any lending without assets used as collateral are considered to be unsecured loans.

Learn about other Financial Terms A Business Owner Should Know

Benefits of having an unsecured business loan

As well as the advantage of not having to provide collateral to secure a business loan, other benefits include:

Faster approval: Unlike a secured business loan, you do not need to complete paperwork based on the value of your assets.

Flexibility: Not being restricted by your loan means you are able to use the funds freely. For example, it could be used for working capital, equipment or marketing.

Preserves equity: Not having to compromise your assets allows you to maintain full ownership of your business.

Builds credit and relationships: If you successfully repay your unsecured loan, it can have a positive impact on your business credit rating, as well as your relationship with future lenders.

Disadvantages of having an unsecured business loan

Although having an unsecured loan might sound like the better option, it is essential to note any potential drawbacks that could put your business at risk.

Disadvantages of having an unsecured loan could be:

Additional costs: Due to the fact that an unsecured loan is being built on the basis of your credit score, you could face higher costs and risk a higher interest rate.

Repayment failure: As well as your business’s reputation, you can damage your credibility from the lender and future lenders.

Lending limit: If you require a bigger loan, you may find difficulty in finding a lender that can lend the amount.

What’s the maximum amount I can borrow?

In order to access an unsecured business loan, all applications are dealt with on an individual basis subject to credit checks. The general costs of an unsecured business loan can range from £5,000-£500,000.

What do you need to apply for an unsecured business loan?

When you fill out a loan application, the lender will need to evaluate your business based on the following:

  • Bank statements of your business
  • Business documents, such as financial reports, and profit and loss statements
  • Current monthly payments that your business makes

Ready to find the right business loan for you?

Now that you have considered the pros and cons of an unsecured business loan, you should be ready to make an informed decision to improve your business and help it grow.

At Union Business Finance, we have more than 10 years experience in helping businesses achieve their financial goals.

Ready to get started? Contact us today.

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Aintu Ltd T/A Union Business Finance is an independent Asset finance broker not a lender, as such we can introduce you to a wide range of finance providers depending on your requirements and circumstances. We are not independent financial advisors and so are unable to provide you with independent financial advice. Aintu Ltd T/A Union Business Finance will receive payment(s) or other benefit from the finance provider if you decide to enter into an agreement with them. Aintu Ltd T/A Union Business Finance is an appointed representative of AFS Compliance Ltd which is authorised and regulated by the Financial Conduct Authority under number 625035. Aintu Ltd T/A Union Business Finance aims to provide our customers with the highest standards of service. If our service fails to meet your requirements and you would like to report a complaint; please click on the link below;


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