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Borrowing money is part and parcel of owning and running a business. Both small businesses and large corporations take out loans to fulfil their additional financing needs, whether it’s paying for overhead costs, ordering inventory, or expanding operations. There are two types of business loans that you can take to finance your business needs; secured and unsecured loans. In this blog post, we’ll be looking at unsecured business loans.
What is an unsecured business loan?
An unsecured small business loan is a type of finance that does not require you to provide security. Unlike a secured business loan, where the lender can sell your assets to recoup the cost of the loan, your company’s valuables are protected with an unsecured loan. This type of funding is an excellent option for businesses that don’t have enough assets to offer as collateral or companies that prefer not to provide security.
What is the difference between a secured and an unsecured loan?
Secured loans require you to provide tangible assets as part of the borrowing agreement. If you’re unable to pay back the money, the lender sells the help provided to recoup the loan cost. Inherently, this makes secured loans riskier for businesses because you could lose your assets. Examples of fast loans include construction loans, mortgages, and auto loans.
Unsecured loans require no security; the lender offers the loan solely based on your creditworthiness.
On the other hand, unsecured loans require no security; the lender offers the loan solely based on your creditworthiness. Because unsecured loans pose a greater risk for the lender, they will accrue higher interest rates than usual. Unsecured loans include education loans, personal loans, and credit card purchases.
How do unsecured loans work?
Unsecured business loans work by providing small businesses and SMEs with upfront capital without requiring any security. The lender then creates a flexible payment plan to repay the money. The repayment structure is pretty straightforward; you will make fixed monthly payments at a pre-determined interest rate until you pay back the borrowed amount in full.
How to get unsecured business loans?
As mentioned earlier, unsecured loans are offered based on your creditworthiness. So, how do you prove to a lender that you’re worthy of a loan?
• Your business must have been in operation for at least four months
• Have an excellent personal and business credit history
• Your business, whether a sole proprietorship, limited company or limited liability company, must be registered in the UK
• Your business must have an annual turnover of at least £10,000.
• In some cases, you may be required to have a personal guarantor. If your business cannot repay the loan, your guarantor will be required to pay back the remaining balance.
In addition to that, you will be required to provide certain documents when applying for an unsecured loan in the UK. Of course, these documents vary from lender to lender, but as a rule of thumb, be ready to provide:
• Proof of identity
• Business verification documents
• Supporting documents such as bank statements
What are the pros and cons of unsecured business loans?
Pros of Fast Unsecured Business Loans
1. Collateral isn’t a requirement
This has to be the most significant advantage of unsecured loans. Since lenders don’t ask for any security, many start-ups and small businesses can access the required funding to get their businesses off the ground. If you don’t have assets to offer up as security for a loan, apply for an unsecured loan today.
2. A shorter loan application process
Applying for a business loan can be a painstaking process. Financial institutions need to make sure that they are lending money to businesses that can make timely payments and repay the loan in total. So, they need to vet every loan application thoroughly. This applies to both secured and unsecured loans, but secured loans take longer to get approved. After collateral is submitted, the lender must examine it to determine its value and verify that you are the rightful owner, which can be time-consuming.
Since no collateral is submitted for unsecured loans, the lender can focus on your verifying your time in business, credit report, and monthly sales as soon as possible. This streamlined process makes it possible for you to get your money as soon as 24 hours after applying for the loan.
3. You won’t risk losing collateral
When you offer the security of your assets for a secured loan, the lender can repossess them when you default. Unsecured loans eliminate this risk since you’re not required to provide any guarantee. If you’re unable to repay the loan, your guarantor can step in and help you out. If that fails as well, you could file for bankruptcy to prevent the lender from getting a court order to seize your assets. Unsecured loans are a significant funding source for new businesses that haven’t found their footing just yet.
4. Flexible repayment terms
Unsecured loans are usually repaid over one month to five years, short or medium term. The lender will create a customised repayment plan for you with no hidden fees or extra charges.
5. Use for any purpose
You are not limited to what you can do with this type of business loan. You can use it to hire new talent, expand your business in the country or overseas, buy new equipment, etc.
Cons of Unsecured Business Loans
The only thing you have to be wary of when taking an unsecured business loan is the high-interest rates. However, this is warranted since the lender does not have a clear path to recoup losses if your business fails and you cannot repay the money. Read more about understanding business loan rates here.
Are unsecured business loans safe?
Yes. Unsecured loans are one of the safest funding options for businesses.
Are you looking for finance to grow your business?
Look no further. We offer fast unsecured business loans to small businesses at Love Finance.
Contact us today to get an instant quote.