What is an unsecured loan and how can it help your business?
Unsecured loans are facilities that enable you to borrow money from a lender without having to offer up any collateral, or security, against the amount.
These are also referred to as signature loans as that is all that is required from the funder once a facility has been agreed upon.
Unsecured loans are typically loans of a minimum amount of £25,000 (a varying amount from funder to funder), which is repaid monthly with interest over an agreed-upon, fixed term.
It’s left to the customer to decide their preferred length of the facility, but it usually falls between one and five years, though certain lenders can stretch an unsecured facility to ten years.
These facilities tend to be a higher risk for lenders, with credit history and financial history documents being the only assurances available to them, without any physical collateral.
This can induce higher interest charges and certain funders require high credit scores for approval. The rates also remain higher than secured loans as, if a borrower stops making payments and defaults on the unsecured loan, there is no collateral for the lender to take as compensation for the outstanding debt.
How do unsecured loans work?
Many lenders offer ‘soft-touch’ prequalification quotes, and these allow us to enter your basic details to ascertain whether you can qualify for that lender’s rates. Whether this is a positive or negative outcome, you will be provided with feedback as to the decision to further help your business finance’s current position and future.
When you apply for an unsecured loan, it is generally straightforward – you will need your basic personal and/or business details, have an idea of the amount you are looking to borrow and the term you would like the facility to be held over. Funders also tend to ask for financial documents to assist with their credit team’s evaluation of your debt serviceability.
Once the unsecured lender’s credit team has completed their evaluation, they will issue a response with feedback included. Sometimes this can be accepted with the condition of further documents being provided, or it is a guaranteed decision. These decisions are normally issued within 48 hours.
Despite being ‘unsecured’, Personal Guarantees (PGs) are often required with unsecured facilities for businesses.
If a negative decision has been provided, feedback will be provided, but as there is such a strong focus on creditworthiness in unsecured loans, it is normally wise to check your credit score to see if there are any abnormalities.
Once an approval has been submitted, documents are issued quickly to the customer, normally as an e-sign document, and funds are typically released within 24-48 hours.
If you default on an unsecured loan, this will have an adverse effect on your credit score – the same as any other missed or late payments.
Should I get an unsecured loan?
In a rapidly advancing tech-heavy world, more businesses are having less tangible security to use as collateral when applying for a loan.
For example, a software or consultancy company may have a rented office space, IT kit and no cash-rich physical assets with the resale value to secure the loan they need. An unsecured loan removes these obstacles and allows the business to receive funding simply based on their financial standing.
Without collateral to offer up as security, unsecured loans are ideal to access the monies you need quickly. However, as the risk to the lender is higher without said collateral, interest rates can be higher than secured loans. Those with excellent credit scores, however, will have access to competitive rates from the more inexpensive funders.
Uses of Unsecured Loans
- Cashflow boost
- Business growth
- Stock/asset purchase
- One-off costs
- Premises expenses
Benefits of Unsecured Loans
- No collateral or security required
- Fast access to funds
- No risk of losing assets
- Fewer borrowing restrictions
- Competitive rates for those with strong credit
Disadvantages of Unsecured Loans
- Charges for early repayment
- Minimum terms are usually a year – loan amounts do not factor into this
- Likely lower borrowing limits for those with low credit scores
- Likely higher interest rates for those with low credit scores