What are the top pros and cons of unsecured business loans?

7 Aug 2022

Lots of businesses – even the most profitable – require [business loans]( to fund their financial needs. Whether you need finance to take your company to the next level or manage your day-to-day cash flow, you could use an asset to secure finance. But what if you don’t own assets? Is it possible to get a loan if you’re unable or don’t want to offer security? Yes – that’s where unsecured business loans come in.

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Secured vs unsecured business loans

A secured business loan is one that requires the borrower to offer a company asset as “security” for the loan, enabling the lender to protect their working capital.

This asset could be a commercial property, a company vehicle or an item of equipment or machinery. If the loan isn’t repaid, the lender takes ownership of the asset in order to recoup the money they lent. 

Unsecured business loans, on the other hand, don’t require security. They can offer a solution to businesses that don’t have any assets, don’t want to put their assets at risk or those who want to borrow more than their assets are worth. 

There are many instances where an unsecured loan could come in handy. A seasonal business might use one to plug a gap in working capital. A startup might opt for one if it doesn’t have sufficient assets to be eligible for secured finance. 

Personal guarantees for unsecured finance

In the absence of collateral, unsecured loan lenders might require you to provide a personal guarantee. This legal document says that if you can’t repay your business loan, the lender can recoup their money by pursuing your personal assets. 

However, you might be eligible for finance without having to provide security or a personal guarantee. Let us know how much finance you require and what you’re going to use it to fund, and we’ll search the market for the best deals. 

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Unsecured business loan pros

1. Frees up your assets 

 With an unsecured business loan, the lender isn’t able to take your company assets if you default (after all, you haven't offered them as collateral). This means you’re free to sell or replace your assets without needing to get permission from the lender. 

2. Fewer upfront costs 

When taking out a secured business loan, you’d typically have to pay for the costs associated with valuing your assets. Without this, the upfront costs of getting an unsecured business loan can be lower (although, as you’ll see in the “cons” section of this article, interest rates can be higher).  

3. Shorter application process

Providing an asset as security can slow down the process of getting finance too, because the valuation process can be time-consuming. 

Without the need for an asset valuation, unsecured finance lenders will focus on your credit rating, monthly turnover and trading history. In some cases, businesses can get the funds within 24 hours of submitting their application. 

This level of speed can be invaluable if you need finance quickly. 

4. Wide range of providers and products 

There’s an array of unsecured business loans out there today, designed for different purposes and types of business. As well as term loans, where you agree to pay back a set amount each month, there are other forms of finance to choose from.

A merchant cash advance is one popular alternative to a traditional bank loan. 

In fact, a merchant cash advance is not a loan, but a commercial transaction where the lender purchases a percentage of your future sales. MCAs are unsecured, so you don’t have to risk your business assets in order to qualify for one. 

Unsecured business loan cons

1. Smaller loan amounts

Owing to the higher risk associated with unsecured finance, you might not be able to borrow as much through a secured loan as you would with a secured one. Security protects the lender, making them more likely to lend larger amounts. 

Unsecured loans can be suitable for short-term funding. Bear in mind that you might not be eligible for the amount you need to fund an expansion project, purchase an expensive piece of equipment or place a large inventory order. 

2. Higher interest rates 

Unsecured business loans tend to come with higher interest rates. Again, this is because, from the lender’s perspective, unsecured finance carries more risk.

3. Importance of credit score

 Your unsecured business loan application might be rejected if you have a bad credit rating. When there’s no collateral, your credit score becomes even more important. You could still be eligible for a loan, but you may have to pay a higher rate of interest. 

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How to get an unsecured business loan

You can use Funding Options to find the best unsecured finance solution for your needs. Instead of having to wait weeks or months for funding, our technology quickly validates your business profile and matches you to the industry’s largest lender network. We’ll guide you through the entire process – from application to funds in the bank.

To kickstart your funding journey, tell us how much you need to borrow and what it's for. We’ll also ask you to provide some basic information about your business.

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Joe Morley
Joe Morley

Head of Unsecured Lending

Joe has worked in the alternative lending space since 2015. During this time he has helped hundreds of SMEs access millions in essential funding ranging from long-term asset-backed lending to short-term unsecured revolving credit lines and beyond. In his role, Joe manages and supports a large team of Credit Finance specialists.

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