Unsecured business loans

With late invoice payments on the rise and 12% of mid-sized companies in the UK owed more than £250,000, it’s no surprise that many businesses turn to finance solutions to help them manage cash flow.

Business loans are a popular tool for many, but what if your business doesn’t currently hold any assets, or, what if you simply don’t want to use your business assets as collateral?

In these cases, unsecured business loans may be able to help.

What is an unsecured business loan?

An unsecured business loan allows a business owner, sole trader or limited company to access finance without having to use assets as security. As well as an option for businesses with no assets, unsecured business loans could suit companies that would rather not put forward their valuable assets as security. 

You may, however, have to provide a personal guarantee or a director’s guarantee. This means if your business can’t repay the loan, you’ll have to step in and repay it.

Examples of unsecured lending 

Contextualising a type of finance can occasionally help you gain a deeper understanding of that tool. In that vein, here are some examples of unsecured lending: 

Marketing agency

The Marketers have just received a request from their longtime client, Zip Zap. Historically, Zip Zap have always asked for the same amount of design work every single month, which The Marketers have always been able to deliver. But, following solid growth in Q4, Zip Zap have suddenly, and with urgent need, increased their workload request. 

If The Marketers can deliver on this increased work, they’re in for a huge growth spurt themselves. But, if they can’t, Zip Zap will be forced to go and find a bigger agency that can deliver. 

Per their agreement, The Marketers won’t be able to invoice Zip Zap until the end of the month, and they won’t receive the funds until the month after that. As a younger, more agile, remote company, The Marketers don’t have any assets beyond their invoices, which they don’t want to touch, and their computers. 

To onboard a team of skilled freelancers and deliver during the initial project period, The Marketers could take out an unsecured business loan. Upon completion of a successful application, they would receive the emergency cash injection, which they could then repay back slowly over the following year as they deliver more and more work for Zip Zap. 

In this instance, an unsecured business loan could help The Marketers grow. 

Entertainment and media talent agency 

Talent, an entertainment talent agency, are often required to fly out their media staff. While they recoup the costs from the end client, tracking the costs can be tricky, paying the flight fees upfront negatively impacts their cash flow, and they’re paying for so many flights and hotels that they’d love to start getting some kind of benefit out of these fees. 

To save time, improve working capital, and gain the added boost of flight miles and credit card points, Talent decides to take out a company credit card which they will only use for travel costs. This ensures they can effectively track their travel expenditures and enables them to delay the payment of their fees by a month, which is enough time to recoup the costs from the end client. Also, with smart permissions features, they are able to control expenses more efficiently. 

Who are unsecured business loans for?

Unsecured business loans are a form of funding suited to all sorts of businesses, but here are a few of the business types that might find them most useful. 

New businesses and start ups

If you’re a new, growing company, it’s possible you may not have collected many assets yet. This could present an issue when it comes to applying for funding. Since, unlike asset finance bridging loans, and other forms of secured loans, unsecured business loans don’t require assets, they’re a suitable option for new businesses. 

Transitioning businesses 

Businesses starting, or about to start, the acquisition process, might find that now isn’t the time to take out a business loan on their assets, as the acquiring company may have concerns about their financial and asset flexibility and asset ownership. However, they may still need to take out funds to pay off lingering debts and historic bills, ensuring they’re in a strong financial position for cost negotiations. Since unsecured business loans allow businesses to maintain complete control over their assets, this could make for a smoother transition. 

Similarly, other moments of transition, such as moments of extreme growth, restructurings, and even succession planning, can present unique financial challenges along with key reasons the business may not want to complicate asset ownership. Unsecured business loans can help drive strategic growth initiatives, improve cash flow, and maintain financial flexibility, without the need for complications surrounding ownership.  

Businesses with fluctuating assets 

Businesses whose assets lie mostly in inventory or stock, such as ecommerce merchants, might find unsecured business loans more suitable. This is because it can be harder to set up secured business loans with assets that will soon be sold and replaced than with more fixed assets, like property. 

Online businesses 

The lean operational models of online merchants and remote B2B companies make them suitable candidates for unsecured business loans. This is because they may have no fixed premises, which indicates no need for an owned property, a company car, or expensive equipment, all of which could be used as security for a loan. Great for profitability, not so great for secured funding applications. This makes unsecured lending a suitable solution for online businesses.   

How do unsecured business loans work?

Unsecured business loans work by providing businesses access to finance without the need for collateral. Instead of collateral, lenders rely on their assessment of a business’s creditworthiness, cash flow projections, history with financing, and company details to assess their likelihood of repaying the loan.

While no collateral is required and approval times are usually faster for unsecured business loans than with secured business loans, interest rates may also be higher and the amount you can borrow is usually reduced. Depending on the type of unsecured business loan you seek, you may need to repay the full loan at the end of each month, as is the case with a revolving credit facility.

What is creditworthiness?

Creditworthiness is how banks and financial institutions assess your likelihood of repaying the loan. This assessment helps the lender decide if they’d like to extend a loan and, if so, how much funding they’d like to grant. To determine your creditworthiness, lenders will look at your:

• Company credit score

• Personal credit score (if you provide a personal guarantee)

• Trading history

• History with credit

• Ability to repay the loan

• Income and expenses

What can I use an unsecured loan for?

An unsecured loan is a suitable option for a range of business purposes, including:

• Managing cash flow

• Paying employees

• Enabling growth at your small business 

• Making strategic investments

• Covering emergency expenses

• Navigating seasonal fluctuations

• Renovating or upgrading your company premises

• Paying a tax bill

• Buying inventory

• Purchasing equipment or property 

How can I get an unsecured business loan?

There are various ways to get an unsecured business loan. You could approach a high street bank or financial broker, or use a lending marketplace like Funding Options by Tide. Your business needs to have been registered in the UK for a minimum of six months, should have a UK bank account, and have a minimum turnover of around £5,000 per month. 

To speed up the application process, prepare these documents:

• Recent business current account statements

• 6-month annual returns (profit and loss accounts)

• Accounts filed with HMRC

• 6-month trading history

• Personal guarantee from a director (although this is not always required)

What’s the maximum amount I can borrow?

The amount of unsecured business finance you can get varies from lender to lender. The amount on offer will also depend on your annual revenue, credit score, and the financial situation of your business. 

The majority of unsecured business loans are for £5,000 to £500,000. It would be rare for a lender to offer more than £500,000 (unless the business owner has a long and demonstrable history of business successes).

Pros of unsecured business loans

• No need for collateral: The primary benefit of an unsecured loan is that there is no need for collateral, however, do be aware that many unsecured business loans require personal guarantees and an inability to repay will still lead to severe consequences.

• Fast access to funds: Unsecured business loans tend to be processed faster than secured ones since there are no assets to value.

• Manage cash flow: Unsecured business loans come in all shapes and sizes, some are repaid monthly, others are repaid all at once and then made available again the following month. This flexibility can be a helpful tool for business leaders looking to manage cash flow.

Some drawbacks to be aware of

• Higher interest rates: Since unsecured business loans carry higher perceived risk to the lender interest rates can be higher.

• Personal guarantee: In lieu of collateral, some lenders ask directors to sign a personal guarantee when taking out an unsecured business loan. A guarantee makes you personally liable for the loan.

• Reduced loan amounts: Secured loans usually provide funding for a percentage of the value of the asset used. So, if you were to take out a secured bridging loan with a property worth £500,000 as collateral, you could get up to £375,000 in funding. Unsecured loans don’t offer this advantage, so your borrowing limit is reduced.

Four types of unsecured business loans

Aside from unsecured term loans, merchant cash advances, revolving credit facilities, overdrafts and business credit cards are also forms of unsecured business finance. Let’s take a closer look at the main features of these options. 

1. Merchant cash advance

A merchant cash advance is an unsecured loan that is repaid as a percentage of your customer card sales. As the lender has visibility into your business’ cash flow, you can bypass the need for extensive credit checks or security. 

Your business repays what it can afford, as a fixed percentage of monthly sales. If sales dip, the amount taken by the lender is also reduced, so you can get a better handle on your business finance requirements. The lender will also charge a fee.

You might be able to borrow between £10,000 to £350,000, with more on offer from specialist lenders. You need to have been trading for a minimum of six months and take on average £10,000 per month in debit and/or credit card sales.

What can you use it for?

• Repairs

• Stock

• Working capital

• New machines

• Technology upgrades

• IT investment

2. Revolving credit facility

A revolving credit facility is a type of unsecured lending that gives business owners a chance to withdraw money, spend it, repay it, and then withdraw more as and when they need to. It’s a flexible approach to borrowing and there’s no need for security. 

As with a merchant cash advance, the amount on offer will depend on the size of your business and credit history. The range is usually between £1k and £20M. 

Revolving finance can be useful for businesses that experience sharp fluctuations in cash flow. It’s sometimes used by companies that have, at times, low or negative cash balances in order to support their working capital needs. 

It’s considered a form of short-term financing that is usually paid off quickly.

What can you use it for?

• Developing new products and services

• Staff recruitment and training

• Cash flow management 

• Purchasing stock or equipment

• Paying emergency or unexpected bills, such as repairs and renovations

• Supplementing traditional business loans

3. Business overdraft

A business overdraft charges interest on the overdrawn amount, unlike a business loan that carries fixed repayments and interest. You can negotiate an increase in your limit to reflect your current requirements, pending approval from your lender.

Business overdrafts are probably the most common type of unsecured funding on the market, but they’re usually used for short-term expenditures and small amounts. The average business overdraft ranges from £500 to £50k. 

What can you use it for?

• Cash flow issues

• Unexpected bills

• One-off expenditures

4. Business credit cards

Business credit cards are a flexible form of business funding that are typically used for day-to-day expenses. With an average financial position, your business can expect to secure a credit card with a limit of between £1,000 and £10,000. 

Credit cards can be useful for businesses with lots of miscellaneous day-to-day expenses and strong monthly cash flow. Ideally, they should be repaid at the end of every month, otherwise interest charges will accumulate. 

What can you use it for?

• Day-to-day expenses

• Employee entertainment

• Unexpected costs

• Emergency expenses

Secured vs unsecured business loans: what’s the difference?

Unlike an unsecured business loan, a secured business loan requires your business, as the borrower, to provide a business asset as security for the loan. This could be commercial property, vehicles, plant and machinery or your accounts receivable.

The amount you can borrow through secured finance depends – to a large extent – on the value of the asset offered as security. The amount you can borrow through an unsecured loan will usually be a multiple of your annual business turnover. 

Unsecured finance tends to be quicker to arrange because you don’t need to go through the asset valuation process. You’ll probably get the funds quicker but interest rates are usually higher because there’s a higher level of risk to the lender.

How do interest rates work?

Interest is usually charged on the loan amount. This means as well as repaying what you owe, you will also pay a percentage of what you borrow as interest.

Use our business loan calculator to determine how much the loan could cost you. 

APR: The APR is the Annual Percentage Rate, which is how much the borrowed funds will cost you over the course of a year. For example, let's say you borrow £10,000 at an APR of 10%. If you take out an interest-only loan, you would be charged £1,000 in interest across the year. 

APR can get confusing because it’s more common for borrowers to pay part of the loan across the year as well as the interest, so if you start with a balance of £10,000, your balance will likely decrease across the year meaning you would pay less and less in interest each month.

Fixed rate: A fixed rate is an agreed percentage that will remain the same throughout the loan term. Opting for a fixed rate loan can help with budget planning.

Variable rate: A variable rate means the interest rate can fluctuate depending on the economy and the lender.

Will I be charged any other fees?

Depending on your agreement with the lender, you could be charged some of the following fees on top of interest:

• Early repayment fees: This is charged if you want to repay the loan in advance of the pre-agreed date

• Late repayment fees: This is charged if you miss a payment or pay late

• Admin fees: You could be charged for setting up the loan, however, this is more common when applying for a secured business loan as you may have to pay for a valuation of the asset used

• Annual fees: Some lenders charge annual fees

• Legal fees: If you use a lawyer to assist you in setting up the funding they may charge you

• Exit fees: Some loan types (like bridging loans) include exit fees

Am I eligible?

To meet the eligibility criteria, you must be over 18, your business must be based in the UK, and you should have been trading for more than 6 months. You should also be able to afford the loan you want to apply for.

Example: Let’s say you make £10,000 in revenue per month and your expenses are £8,000. Your monthly repayments for a loan you’re applying for would be £1,000, in this instance, you may be able to afford the loan and therefore it’s possible you are eligible.

If you can’t afford the loan via cash flow, consider if you have any other means of repaying the loan that you can present to the lender to demonstrate eligibility, for example:

• Savings

• An upcoming payment from an investor

• A signed deal with a new client

• A strong business plan

• Funds owed to you in outstanding invoices

Should I apply for unsecured business loans?

Only you can truly decide if you should apply for an unsecured business loan, but here are some questions you might like to ask yourself to help you come to a decision: 

• Do I want to use assets as collateral for a loan? Unsecured business loans do not require the use of assets as collateral, but they do usually come with higher interest rates than loans that do require security. 

• Can I repay the loan? What if something goes wrong, for instance, what if a client delays payment or the economy takes a sharp and unexpected downturn? If something like this were to happen, you would still be expected to repay the loan in full. 

• Am I happy to have my credit score checked? Many lenders check credit ratings, either personal or business scores, sometimes both. Sometimes, to counteract the riskier nature of unsecured loans for the lender, they may also request further information, such as asking for a personal guarantee from the company director or cash flow projections. 

• How much money do I want to borrow? Unsecured business loans tend to have lower borrowing limits than secured loans, again, due to the higher perceived possible risk to the lender. If you’re seeking a very large loan, a secured loan may be in greater alignment with your goals. 

Unsecured business loan FAQs

Find an unsecured business loan with Funding Options by Tide

Every business has different needs, circumstances and goals. To get help applying for an unsecured loan, reach out to our expert support team. Just click the link below and tell us how much funding you need, what it’s for and how quickly you need it. It’s free to apply and getting a quote won’t affect your credit score.  

Find an unsecured business loan.

Please note that the information above is not intended to be financial advice. You should seek independent financial advice before making any decisions about your financial future.

It’s important to remember that all loans and credit agreements come with risks. These risks include non-payment and late-payment of the agreed repayment plan, which could affect your business credit score and impact your ability to find future funding. Always read the terms and conditions of every loan or credit agreement before you proceed. Contact us for support if you ever face difficulties making your repayments.

Funding Options, now part of Tide, helps UK firms access business finance, working directly with businesses and their trusted advisors. Funding Options are a credit broker and do not provide loans directly. All finance and quotes are subject to status and income. Applicants must be aged 18 and over and terms and conditions apply. Guarantees and Indemnities may be required. Funding Options can introduce applicants to a number of providers based on the applicants' circumstances and creditworthiness. Funding Options will receive a commission or finder’s fee for effecting such finance introductions.