Unsecured Business Loans | All you need to know about unsecured finance

Unsecured Business Loans, a high-volume search in many major search engines. So why are businesses searching for unsecured loans as opposed to secured business loans UK?

Are businesses hesitant in securing funding against tangible assets in the event of missed payments or defaults or are they unaware of the potential benefits of using secured business funding?

What are unsecured loans?

In the modern world of business, it is not always easy to get a loan. Banks and other financial institutions have become stricter with their lending policies, and it can be difficult to get approved for one.

This leaves many businesses in a tough position where they need capital but cannot get it through traditional channels.

Unsecured business loans do not use any personal or business assets as collateral and can provide the necessary funds for many businesses to thrive. However, in most cases lenders will require personal guarantees of the directors and/or business shareholders/owners.

They are available for short-term and long-term needs, which means that they can help a company in its early stages or provide funds for expansion when needed. Terms are typically 1 to 5 years with monthly repayments.

They are becoming a more popular as a way for small and medium size businesses to get the funding they need to stay afloat.

How to Qualify for an Unsecured Business Loan?

To qualify for an unsecured business loan, lenders look at your personal credit rating, financial year end accounts, business bank accounts and management reports to gauge if you can afford the loan.

Lending criteria varies between providers, and each have their own checklist. All lenders must ensure that they act in a responsible manner and comply to responsible lending criteria.

What is Business Loan Affordability?

Affordability assessments are a way to determine whether you will be able to afford your loan repayments, be able to complete the loan term and whether your business can demonstrate serviceability for the loan facility.

Affordability relates to the financial impact of repayments on your business's financial health.

If these would have a negative impact on the operation of your business, such as cashflow issues, having to sell assets or even having to take out additional business loans to cover your payments then approving the loan application would be “irresponsible” and break FCA guidelines.

Responsible lending regulations cover a variety of areas. To name some below:

  • Loan Type
  • Loan Amount
  • Total Loan Cost
  • Company financial status
  • Applicant(s) personal credit history
  • Any existing loan agreements
  • Applicant(s) vulnerability, regarding their mental capacity to understand the obligations and any risks involved in taking out a business loan
  • What the funds are to be used for

Using the information above, a lender would not approve your application if they thought you couldn't afford the loan.

Applying for an unsecured loan?

The first step is to determine how much you need and what the funds are for. It's important to be realistic about your needs, so don't try and estimate incorrectly.

To be approved for a loan, you may have to provide information related to your work history, profit and income and other business financial documents.

For new starts or businesses that have been trading for less than 12 months, unsecured lending can be more difficult to get.

For businesses that have been established for longer, finance can be easier to get as lenders can gauge your business and borrowing behaviour more easily.

Once you have determined how much you need to borrow, you can start applying for loans online, through a bank or using a finance broker.

Whichever route you take you will need to answer questions about your credit score, income, revenue, and other criteria that will determine whether you will qualify for the loan.

Bad Credit Applications

A credit score is not the only factor that determines whether you will be approved but it will have a big impact.

The important part here is to identify which lenders are more likely to approve a bad credit application.

To qualify for a business loan with bad credit you need to find out the minimum credit score to qualify for a loan for each lender, however this isn't easy.

Some lenders will need higher credit scores, but others may be more flexible about your situation.

It's important to compare the different lenders and find one that is willing to work with your situation.

It's also important that you are honest with your prospective lenders about your financial situation.

Which are the best unsecured loan lenders?

Lenders have their own ideal clients and loan types. Whether or not you suit a particular lender can be hard to determine before you apply and the possibility of being declined can be hard to gauge.

Multiple declined applications in a short space of time can have a negative effect on your credit source and ability to get a loan. Because of this, many businesses choose to use a commercial finance broker to maximise their chances of success. [find out more].

Finance brokers with a diverse lending panel can source more suitable and cost-effective loans for their clients based upon their circumstances.

A good finance broker will know which lenders to approach to reduce the risk of rejected applications based on your status and borrowing needs.

What are the Pros and Cons of Unsecured Business Loans?

  • Easier applications (in most cases). Without the need for security there is less paperwork that needs to be completed when applying (Personal Guarantees may be required)
  • Can be taken on a rolling basis. Unsecured loans are relatively easy to top up or take out on a rolling basis. They are also easier clear with debt consolidation loans.
  • No physical collateral is needed for security but personal guarantees of the directors and or shareholders/owners of the business may be required.
  • May not be the best fit for your circumstances. If your financial position isn't particularly strong, or if you haven't been trading for long, the chances of approval and loan amounts can be low compared to secured loans.

The use of unsecured business loans for self-employed businesses, SMEs or large corporations can be highly beneficial and effective way to increase cashflow and spending power.

For more information on unsecured business loans for UK business, do not hesitate in contacting us to discuss your loan requirements.

Updated: August 9, 2022