What Is an Unsecured Business Loan? All You Need To Know

unsecured business loans
Photo by Andrea Piacquadio

Are you an entrepreneur with fantastic business ideas but no funding, or do you have a startup company that needs to expand but has a limited budget? I understand how disheartening it can be, but have you considered unsecured business loans? If so, do you understand how they work, the benefits unsecured business loans offer to small and startup businesses, and the rates they charge?  Grab a cup of coffee and allow me to break it down for you.

In this article, we will discuss the definition of unsecured business loans, the benefits of small unsecured business loans, loan interest rates, and how to apply for the loan.

What is the Definition of an Unsecured Business Loan?

An unsecured business loan enables a small and startup business owner, sole trader, or limited company to obtain loans without pledging company assets as collateral. In addition to being an option for businesses with no assets, unsecured business loans may be appropriate for businesses that prefer to avoid putting up valuable assets as collateral.

However, you may be required to provide a personal guarantee or a director’s guarantee. Numerous UK lenders can provide funds for your small business’s working capital, growth, or expansion, and if you like the idea of making fixed monthly payments over a set period, a business loan (whether unsecured or secured) may be your best option.

Who is A personal Guarantee on an Unsecured Business Loan?

A personal guarantee on an unsecured business loan is a written guarantee that you will repay the loan if your company is unable to make payments. Although no security is required for an unsecured loan, many lenders require a written guarantee that the business owner or director will be responsible for the lease, loan, or other debt repayments if the business is unable to do so.

If the business defaults, you, as the business owner or director named in the personal guarantee, will be held liable for the debt. The lender will then take recovery measures if you default on the debt. If you are unable to pay, you may face legal action and even bankruptcy.

How Does Unsecured Business Loans Work?

Unsecured business loans provide upfront capital to your small business without requiring security. There are numerous unsecured business loan options available, each with different terms to suit different types of businesses. Funding is usually available quickly, often on the same day. You repay your loan in monthly or quarterly instalments over a set period, and you can choose between a short-term loan and a medium/long-term loan (i.e., a ‘term’ loan, depending on your business needs. Also, you may be able to pay off your loan early (in some cases without penalty). You may also be able to arrange for options such as a payment holiday. These allow you to take a break from repayments for a set period which may have an impact on your credit rating.

Requirements For Unsecured Business Loans

The requirements for an unsecured business loan are straightforward. Your business must be registered in the UK for at least six months and generate some sort of revenue (£5,000 per month should suffice). Applicants must be at least 18 years old. More specifically, the lender will most likely consider the following:

  • Turnover and profit (about loan amount)
  • financial statements
  • deposited funds
  • trading record
  • Payment history (for example, late payments and county court judgements)
  • Directors’ resumes (lenders may require a personal guarantee)
  • projections and business plans
  • Your clients/customers

How to Apply For Unsecured Business Loans

Don’t worry if you’re wondering how to get unsecured business loan funding; the application process is typically simpler than that of a secured loan. When you apply, you must provide personal and financial information such as your credit score, annual income, and existing debts. This information will be used by the lender to determine whether you are a good candidate for an unsecured business loan.

You’ll also need to provide information on how much money you want to borrow and how long you need it for. This is significant because different lenders provide varying repayment terms, interest rates, and fees. When you’ve finished your application, the lender will review it and decide whether or not to approve your request. If you are approved, they will contact you with information on how much money you can borrow and the repayment terms.

What is the Maximum Amount I can Borrow with an Unsecured Small Business Loan?

Funding amounts vary depending on the lender, but you can be offered unsecured business loans ranging from £5,000 to £250,000 based on your monthly revenue.

You can apply to borrow up to two months’ typical income at first, but we’re happy to provide quick and easy top-ups as standard after a few successful repayments.

With so many customizable features, the majority of our customers return to us for additional funding after repaying their initial loan to support their evolving goals.  

Rates of Interest for Unsecured Business Loans

The interest rate on a secured loan, like any other loan, is determined by the product and the risk to the lender (i.e., your business circumstances). If your business has a good credit rating and a solid trading history, you will probably be offered lower interest rates.

Because they are not secured by any assets, unsecured business loans typically carry higher interest rates than secured loans. This is because the lender assumes a greater risk.

What if I Fail to Repay an Unsecured Business Loan?

Missing a loan payment or defaulting on a loan (failing to repay a loan within the agreed-upon time frame) can be disastrous for your business. Before agreeing to a loan, you should investigate the terms and conditions for nonpayment. If you miss a payment, you will almost certainly be fined a percentage of your monthly installments. You may also be required to pay the administrative costs incurred by your lender in notifying you.

Your loan contract will specify what constitutes a default on your loan; it could be several missed monthly payments or just one. While you will not lose any assets if you default on an unsecured loan (unless you have given a personal guarantee), your credit score will suffer. This means you’ll have a harder time getting financing in the future, including other business loans. It can also have an impact on your future business dealings, as many companies conduct credit checks on companies they want to work with.

A low credit score also means you’ll get less favourable terms (for example, higher interest rates) on any future loans or other types of finance you apply for because you’re a higher risk to the lender. While there are ways to improve your business’s credit rating, negative information can remain on your company’s credit file for years.

Utilising Unsecured Business Loans

An unsecured business loan can be used for virtually any purpose. This type of borrowing is typically used by businesses for investments such as purchasing or expanding premises or developing new products. However, a secured loan allows you to borrow more money.

In some cases, your lender may require you to specify the purpose of the loan before agreeing to lend to you. UK businesses that are just getting started may want to consider getting an unsecured startup business loan to cover some of the costs associated with getting a business up and running.

Advantages And Disadvantages of Unsecured Business Loans

Unsecured business loans have their own set of pros and cons, which include

Pros of Unsecured Business Loans

#1. No Assets Required

Because borrowers are not required to put up any collateral in exchange for their loan, it is an appealing option for new businesses that do not yet own major assets, tools, equipment, or land.

#2. The Risk of Losing Assets is Lower

There is less risk of a business losing its valuables if it is unable to repay its loan because there is no need to put down assets as security. Remember that lenders can still sue to recover the unpaid balance by seizing valuable business assets and/or taking revenue.

#3. A Less Complicated Application Process

Because lenders will not need to evaluate assets and valuables, the application process will be sped up.

Cons Of Unsecured Business Loans

#1. Acceptance is More Difficult

Because unsecured loans carry a higher level of risk for lenders, they have more stringent eligibility requirements. If you have a bad credit score or a low income, you may find it more difficult to qualify for this type of financing.

#2. Loans with Lower Amounts

Because unsecured business loans are risky, lenders are more likely to offer you smaller loan amounts.  

#3. Increased Interest Rates

Unsecured business loans frequently have higher interest rates to reflect the level of risk that lenders are taking because they cannot repossess assets if a business fails to repay its debt.

Unsecured Business Loans vs Secured Business Loans

Your assets are used as collateral for a secured business loan. These assets are typically tangible items such as commercial real estate, machinery, or vehicles, but some types of secured lending use intangible assets. Invoice finance, for example, uses your accounts receivable as security. If you fail to repay your secured loan, the lender can sell the assets to recoup the loan’s cost, lowering their risk.

In contrast, with an unsecured loan, the lender has no security and thus cares much more about your business profile, such as your business turnover, trading history, and credit score. The lender may also consider your personal credit history and assets and request a personal guarantee. Because the lender is taking on more risk, unsecured business loans are usually more expensive (i.e., interest rates are higher) than secured lending. Lenders may also offer shorter terms and smaller sums.

Unsecured business loans are typically easier and faster to arrange than secured loans because the lender does not need to inspect or value any assets. These valuations include legal fees, which you must pay upfront. In contrast, an unsecured loan usually does not have any additional upfront costs.

Are Unsecured Loans Costly?

Because there is no collateral, financial institutions make unsecured loans based in large part on your credit score and repayment history. As a result, unsecured business loans may (but do not always) have higher interest rates than secured loans.

Is Business Lending Regulated in the United Kingdom?

The majority of business lending is unregulated, but lending of £25k or less to certain types of businesses, such as sole proprietors, is generally regulated.

What Factors Do Banks Consider When Considering a Business Loan in the United Kingdom?

They will not request accounts, but they will want to see realistic revenue projections – the profit you anticipate making. Lenders will request the last three months’ worth of business bank statements. You should also keep the last three months’ worth of personal bank statements on hand, just in case.

Is a Deposit Required for a Business Loan in the United Kingdom?

A business loan typically requires a deposit of around 20%.

Do you Have to Pay Tax on a Business Loan in the UK?

A business loan is not usually considered taxable income because it is money borrowed rather than money earned through general business practices. The exception to this rule is when your lender or creditor, whether family or friend, writes off part or all of your loan.


Finally, unsecured business loans can provide a financial boost to small and startup businesses, but before you apply, make sure you check the loan interest rates. Remember that while unsecured business loans are convenient, they also have high-interest rates.

Having a basic understanding of unsecured business loans is critical for making an informed decision, whether you are looking for a small unsecured business loan to cover immediate expenses or a startup unsecured business loan.


Leave a Reply

Your email address will not be published. Required fields are marked *