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:
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.
There are different ways unsecured business finance can be obtained.
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
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.
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.
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.
When you fill out a loan application, the lender will need to evaluate your business based on the following:
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.