If you’re unwilling to pledge an asset when getting a loan for your business, unsecured business loans are the best for you.
A security guarantees a lender’s recouping of the sum lent in case a borrower falters in his repayment. But because unsecured business loans do not require security, lenders of this type are taking on a very high risk.
To mitigate these risks, lenders establish a set of criteria to help them better assess a borrower’s capability to pay back the loan with interest. Others set additional requirements to reduce the risk.
Proof of established business
The criteria are varied across lenders but a few of the usual standards laid down for borrowers’ business to meet include operating for a certain number of months or years; earning a certain amount of annual turnover; and being registered in the United Kingdom as a limited company, limited liability partnership or trader.
Mainly, the borrower must prove that his profit suffices to pay with interests during the obligation period – whether monthly, quarterly or annually depending on agreed terms
Passing credit score
When deciding on your application, lenders will also look at your credit score. The computation and valuation of a credit score may vary among several credit agencies, even among the UK’s big three: Callcredit, Equifax and Experian.
Nevertheless, a credit score for all means one thing: a tool that indicates in value how you manage your money.
Your credit score is lower whenever you have a history of late or incomplete payments for a credit or loan. It’s also difficult for lenders to assess the risk of lending to someone who is clean of any credit or borrowings in the past.
Because your credit score can dictate the amount of money and type of deal a lender will allow you to tap, it is important to have a good score. And there are ways to still improve your credit score even as you have been neglectful of it before.
Personal guarantor
Often, an unsecured business loan provider would also require a borrower to enlist a personal guarantor. A personal guarantor, who may be the top director or someone authorized to operate the business, will be tasked to pay back the remaining balance under the agreed terms.
Terms of a personal guarantee agreement would usually include the guarantor acknowledging the lender’s right to file a motion before a court. The court can respond by issuing an order allowing the lender to seize and liquidate the guarantor’s personal assets to an extent that covers the loss.
Although this arrangement seems to put a huge responsibility for one individual to carry out for the sake of the company, this can often be merely an option for the borrower. In case the assignment of a guarantor is conceded to, the company may also seek a higher amount of funding.
Who taps unsecured business loans?
Unsecured business loans are designed for speed and ease. It offers a level playing field for individuals who do not have a personal or business asset to offer as loan security or for those averse to risks that their assets be taken away at once.
As such, it is a popular funding solution for small businesses either seeking a working capital or funding for a business upgrade or expansion.
This is also a preferred option for small businesses like software-producing firms which operate without much tangible assets that are valuable enough to present as collateral.
Unsecured business loans can also be tapped by startups as long as they meet the lender’s credit passing score and other requirements.
Applicants should be at least 18 years old and should reside in the same county where the lender operates.
Pros
· No collateral requirement – This allows companies without assets to obtain loans.
· Speedy and convenient – Financial lenders in many countries, including in the UK, carry the catch line of offering the easiest and fastest way for approval. A decision on your application can usually be made in 24 hours. In addition, most have adopted an online application process, saving borrowers from the hassle of travelling to the physical banks and queuing. Once approved and an agreement on the payment rates and terms has been sealed, the funds can be transferred to your account within a few days.
· More flexible lending terms – Tailored to be adjustable to your financial position and preferred payment duration, unsecured business loans allow you to choose your amount and number of months or years that you feel will put you at an advantage in making the repayment easier to handle.
Cons
· Personal assets, as well as credit score, will be at risk – Once you default in an unsecured loan for which you signed a personal guarantee agreement, lenders can immediately freeze your assets, the fate of which will be up for the courts to decide once the lenders file for bankruptcy. A decision may result in your assets being seized and ordered for liquidation. Aside from losing these possessions, a bankruptcy case can put a huge dent on your credit score that prevents you from getting a loan, or even a job, in the future.
· The maximum credit is usually lower than that of secured loans – Because most lenders offer a limited loan credit, it may be challenging to find a creditor whose offering could match your loan amount required. Some lenders, however, are willing to shell out beyond the maximum level but only the more established businesses, say operating for at least three years ad of course with gains are eligible for higher loans.
· Unsecured loans have high interest rates and fees – The interest rates and fees are relatively higher compared to secured loans because unsecured business loans are riskier. A higher cost means your business may be faced with difficulties in repaying the loan in the long term.
Who offers unsecured business loans?
There has been an influx of alternative finance lenders in the UK market that just the task of listing them all down may be difficult. These alternatives are a shift from traditional funding sources like banks.
Here is a tally of a few popular unsecured business loan lenders in the UK as well as their minimum and maximum credit; annual interest rate and loan term.
| Company | Minimum loan amount | Maximum loan amount | Annual percentage rate representative | Loan term |
| Natwest | £500 | £50,000 | 5.88% to 6.66% (effective annual rate) | Not stated |
| Fleximize | £5,000 | £500,000 | 42.2% for a £25,000 or below | Up to 4 years |
| Santander | £2,000 | £25,000 | 4.9% to 24.9% | 1 to 5 years |
| esme | £10,000 | £150,000 | 9.50% (representative) | 1 year to 5 years |
| Alius Finance | £10,000 | £1,000,000 | 11.28% | 3 months to 5 years |
| Barclays | £25,000 | £100,000 (conditional) | 9.90% | 1 to 20 years |
| iwoca | £25,000 | £500,000 | starts at 4.50% | 3 to 5 years |
| Spotcap | £50,000 | £250,000 | 22.80% | 1 to 24 months |
NOTE: All details in the tally derive from the lenders’ respective websites as viewed on March 22, 2019. The arranged order of the companies does not, in any way, implicate a ranking. Interested borrowers are advised to directly contact the lenders to draw up an estimate that is specific to the loan product chosen.
Why does the lender matter?
The lender you choose will play a big role in your repayment journey. Aside from scouting a lender that can offer a deal best suited for your funding needs, you should also consider where to borrow should you fail to keep up with your agreed-upon payment terms.
This makes having an established relationship with a lender important when choosing whom to borrow from. Chances are, they may deal with you with more leniency than if you were not a long-time client.
But of course, notwithstanding the chances of receiving a more lax treatment from your lender-partner, you must always remember that, at the end of the day, these lenders are still businesses intent on retrieving the capital they exhausted for an investment, if not profit from it.
Going through a legal battle with lenders will be inevitable and will be just a matter of time when you default unless you yourself do everything at your disposal which includes selling other assets. The elevation of the case to the courts should be the ultimate scenario to avoid as lenders will also bill you of their legal expenses and that just adds up to the interest and other fees topped onto the actual sum you just borrowed for.