Are unsecured business loans the right type of finance for your business?

Understanding the difference between unsecured and secured business loans and which is right for your needs is the first thing to do when looking for business financing. Here’s our lowdown on these types of business loans to help you make the very best funding decision to help your business on its path to greatness.

Taking out a business loan of any type is a major financial decision. As a business owner, you may be feeling unsure and confused about the various options open to you. There might be areas you’d like to know a little more about before you start to consider signing on the dotted line with a business loans provider. If this is you, well done for wanting to do your research!

In our experience business owners and leaders, those who take the time to educate themselves about their options as consumers, build great businesses. And it’s business owners and entrepreneurs like you that we want to invest in through our unsecured business loan products.

We’re here to help you make an educated decision and if that means you find that unsecured business loans aren’t right for you at the moment, that’s fine too. Maybe we can work together in the future.

Unsecured business loans are business finance that you can get without having to put up an asset as security. An unsecured business loan provider will lend to you based on your credit history, your business’s credit history and your business and personal financial status. If you miss repayments, you could incur penalties or extra interest costs and your credit file could be negatively impacted.

Unsecured business loans come in different forms, from business bank account overdrafts, to bank loans and online loans. Some lenders may offer loans worth a few thousand pounds, while others may lend hundreds of thousands of pounds, and repayment periods will also vary enormously. However, in general, unsecured loan repayment periods are shorter than those that secured business loan lenders will offer you.

When a lender offers you an unsecured business loan, they are taking on more risk than when a lender offers you a secured business loan. If you fail to repay your unsecured business loan, your lender can lose money. This happens quite frequently to unsecured lenders and, as a result, they cover their backs with higher interest rates.

In short, interest rates tend to be higher for unsecured loans than for secured loans. This is the case for consumer loans and business loans alike.

Remember, with an unsecured business loan of any kind, your lender cannot order the sale of your assets to cover missed repayments.

Key points to note about unsecured loans:

• You won’t have to offer up an asset as security
• Your lender can’t force the sale of an asset to cover payments
• Loan amounts may be lower than secured business loans
• Repayment terms could be shorter than for secured business loans
• Interest rates could be higher than with secured business loans
• You may have to pay more in interest if you miss repayments or pay late
• You may incur penalties if you miss repayments
• You risk damage to your personal and business credit file if you miss repayments

Here are some examples of unsecured business loans and financing:

• Unsecured business bank loans
• Unsecured online business loans
• Business bank overdrafts
• Business credit cards
• Crowdfunding
• Peer to peer lending
• Merchant cash advance
• Lines of credit
• Bridging loans
• Invoice financing

Secured business loans are those you can only get if you have assets, such as property, vehicles or machinery, that you can offer up to your lender as security. Because of this, secured business loans are often secured against the assets they are used to purchase, just like with a residential mortgage, or a car finance loan.

Some examples of unsecured business loans

• Asset finance arrangements
• Commercial mortgages
• Vehicle finance

When considering whether unsecured business loans or secured business loans are best for you, it’s worth considering your credit history. Lenders will always look at your personal credit file, as well as that of your business, when making a lending decision. Unsecured lenders tend to have stricter lending criteria than secured loan providers, as there is more risk involved.

Secured lenders know that their money is safer, as they have an asset as security. However, unsecured lenders tend to be at the mercy of a personal guarantor (usually the business owner herself), alongside affordability analysis. Careful checking of credit history plays a major role in minimising unsecured lenders’ exposure to risk.

Therefore, if you have had significant credit problems in the past, such as CCJs or bankruptcy, you may struggle to get an unsecured loan. However, if you are willing to put an asset up as security, you may have a chance of getting a loan – albeit with risks involved.

If, after reading this article so far, you are still keen to look for an unsecured loan, you might want to know a little bit more about them. What can you use them for in a business setting and how can they help your business thrive and grow?

Small business loans from banks are notoriously difficult to get, and the application process can be stressful and time-consuming. The bank may also ask you how you intend to spend the cash you are borrowing. Online lenders may also ask you your plans for the cash you intend to borrow, but applying will generally be a simpler, quicker process.

Although lenders will often want to know your intended uses for a business loan, you can actually spend the money however you wish once it is in your business bank account. Borrowers tend to use unsecured loans simply to boost their working capital, or specifically as growth capital.

How to use unsecured business loans to boost working capital

• Paying wages
• Covering utility bills
• Paying suppliers
• Paying rent
• Buying stock
• Paying for marketing
• Office supplies

These are everyday, short-term expenses that it is absolutely fine to use an unsecured business loan to cover. Business owners who find that their cash flow is tight at certain times of the year, but still have to keep the lights on and pay their staff, will often turn to an unsecured business loan to boost their working capital.

Another reason you might want to take out an unsecured business loan, however, is if you want to grow your business and need to invest in order to do this. Unsecured loans can help you make the most of opportunities when they present themselves. Here’s how they might help you to grow your business:

• Take on a new contract
• Expand production/manufacturing to meet increased demand
• Move into a larger premises
• Invest in equipment or machinery
• Take on extra stuff in busy times
• Buy stock in bulk
• Invest in a marketing/advertising campaign

These are the kinds of investments that can help your business move onto the next level. Many business owners find they don’t have the cash in their account to make these kinds of investments, despite there being a clear demand for their service/product. Sound like you? Then an unsecured business loan might be worth considering.