What Is an Unsecured Business Loan?

When you apply for a business loan, many lenders will require you to supply some kind of collateral as a kind of insurance against not being able to pay back the full amount over its term. This is usually in the form of some kind of asset or other security. But what if the business is not in a position to offer collateral to secure the loan? Or would simply rather not offer assets as collateral but still require funds to grow the business? Then the answer might be an unsecured SME business loan.

An unsecured loan naturally brings with it a higher level of risk for the lender which generally means that these types of loans may have either strict eligibility requirements or come with higher interest rates than secured loans. They may also ask for a personal guarantee, which is a promise to pay back the loan amount from personal funds if the business is unable to do so.

Let’s take a closer look at exactly what is an unsecured business loan, discover what makes them different from other types of business loan and find out why it might be a good option for some SMEs.

No Collateral

Perhaps the key point of an unsecured loan is that there is no collateral required. This means it is a financial arrangement where a broker provides funds to a business without requiring any tangible assets as security. As such, the business requiring the loan will not be required to secure the loan against property, equipment or other assets the business may own. This means getting a fast business loan unsecured could be a top option for businesses who have yet to acquire these types of assets or are not yet in a position to provide collateral.

Personal Guarantee

So, without the security of assets to back it up, what security may be required to be able to get this type of loan? Although no collateral is needed, the loan provider or broker will still need to protect themselves in the event of non-repayment. Typically this means they require a personal guarantee from the company's directors or shareholders. This guarantee makes them personally responsible if the business defaults, and they will have to pay back the loan amount (plus the agreed interest) from their own personal funds.

Amounts And Terms

The amounts and terms of an unsecured loan generally differ from secured loans and other types of lending. In the UK, unsecured loans are generally between £1,000 and £500,000, with repayment terms typically between 1 to 5 years

Interest Rates

Again, as there is no security against the loan in terms of assets, interest rates tend to be higher than secured loans. Depending on your credit risk banding, APRs range from 6% up to 36%. However, it can be higher than 36% in some cases depending on the exact circumstances of the loan.

Eligibility Criteria

Along with personal guarantees and higher interest repayments, businesses generally need to meet the loan provider’s eligibility criteria. These are the terms and conditions they have decided to make some businesses suitable to receive loans and can differ between providers. However, typically businesses need to have been trading for at least 12 months and have a minimum annual turnover of over £100,000. They also need to be able to demonstrate a good credit history and otherwise stable business operations to get a business loan unsecured.

Check your eligibility for an unsecured business loan or get in touch with one of our advisors to discover more about unsecured loans and why they might be the right option for your business.

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