Simply put, an unsecured business loan allows the borrower access to funds without having to risk assets. They are often more expensive than secured loans where the funder holds some form of collateral in case the borrower defaults.
To understand the difference, put yourself in the funder’s shoes! You lend a pile of cash to a business and all you want to ensure is that it will all be repaid with interest. So the smart thing to do is to keep hold of something more valuable that the borrower owns. The borrower intends to repay the loan so they won’t lose their asset, but if they can’t repay you for whatever reason, you as the funder can recover the lost funds by selling their asset.
Now imagine that you’re still in the funder’s shoes but the borrower doesn’t own anything that you could hold as collateral. You still want to lend them the cash but you need some reassurance that you’ll get it back by the end of the loan term. So you need to check out how their business performs financially; can they afford your repayments based on their turnover? Have they had similar facilities in the past and proven their ability to repay?
Who Can Apply for an Unsecured Business Loan?
OK you can put your own shoes back on now! You’re a business owner in need of cash but you don’t own a house or any other assets that a lender can secure. This means you will have to prove that your business has been consistently turning profits that support the loan repayments, and that it will continue to do so.
This usually means providing at least 6 months of business bank statements, fully audited accounts, or management information (MI), and also a business plan indicating how the finance will grow the company and drive more revenue. A simple business plan template can be found online and writing one up for your business is not as daunting as it sounds!
So who can actually apply? Pretty much anyone! Provided you are a UK resident aged 18 or older, with a limited company or sole tradership and can provide the above documents to support your application, you will get a quick ‘yes or no’ answer from most unsecured lenders. The decision will follow a credit check and be determined by your perceived ability to repay.
Good Gravy, I’ve Been Approved for an Unsecured Business Loan! So, What am I Getting Exactly?
Congratulations, you’ve been approved! But what do you have here? The amount you can borrow will be based on your turnover (Some funders won’t lend more than 10-15% of annual turnover). The rate at which you repay will depend on the lender, your credit history, and the terms of the loan which will usually be over a period of 3 to 7 years. Shorter loan terms can be arranged but often with a higher interest rate.
Let’s review the advantages of an unsecured business loan: The approval process is speedy as a big chunk of underwriting time for secured lending is taken up appraising the collateral. Also, modern lenders use an algorithm to approve making it quicker and easier. Any assets you do have are unencumbered and you can use them as you see fit, so if you need to sell equipment or take out a secured loan later you can. You’ll also be able to use the collateral to keep operating the business if you default.
Let’s review the disadvantages of an unsecured business loan: The interest rates are often higher to compensate the lender for the added risk. Fees can also be high on unsecured loans so that lenders can reduce their rates to make them more attractive. Another aspect of unsecured lending to watch out for is the lack of discipline associated with not having to risk an asset – this accountability can actually be helpful in ensuring your business never lives beyond its means.
I Think I’m Ready to See If I’ll Be Approved, How Do I Apply?
Is your business ready for an unsecured cash injection? Do you have a strong trading history and good personal credit? Take the legwork out of applying all over town to the countless unsecured loan providers by going straight to Reform Financial.
With our expertise we will be able to let you know your chances of being approved from the first conversation, and with our industry connections we will be able to apply on your behalf to the most optimal lenders for your situation. This will save you time and leaves no mark on your credit file whether approved or declined.
So you’ve got nothing to lose! Get in touch today to see if there’s an unsecured loan facility just waiting with your business name on it! Click HERE to see if we can sort it out for you.
