Boost your cash flow with an unsecured business loan

What is the difference between secured and unsecured loans?

With secured business loans, you need to put down some form of collateral as security against non-payment. This is usually a business asset such as property, equipment, or any item that holds value.

If you’re unable to repay your loan then the lender can take possession of the asset you’ve put down as collateral, to settle the debt you owe to them. The benefit of taking out a secured loan is that you’ll likely get better payment terms with a lower interest rate.

An unsecured business loan is ideal for businesses that don’t want to put their assets at risk, or those that don’t have any assets to use as collateral. With higher interest rates and shorter terms, it’s more favourable for businesses that need a faster solution.

Unsecured loans vs secured loans for small businesses

The majority of small business loans are unsecured. This is because, as a small business, you may not have enough collateral to offer the lender as security against non-payment.

With that said, there are some secured small business loans available, so it’s important to shop around and compare your options. Be conscious of your cash flow, assets and liabilities, and the risk you’d be taking with a secured business loan should things not go as planned.

What are the pros and cons of an unsecured loan?

Unsecured loans are popular among business owners due to the lower risk involved – it certainly helps your peace of mind to know that your assets won’t be at risk. The lack of associated collateral means there’s less paperwork, fewer restrictions and minimal hoops to jump through when you need capital in a hurry.

• Free control over your assets: An unsecured business loan leaves you free to buy and sell assets with no restrictions. This means that you have greater flexibility in choosing how you develop and grow your business.
• Fewer upfront fees: Taking out a secured business loan means that you’re likely to have to pay for valuation fees, so that the lender can work out how much your assets are worth. An unsecured business loan skips this, meaning you can invest that money in your business instead.
• Easier for new businesses: If you’re a new business, or work in an asset-light industry, you won’t always have assets that provide enough value for a lender, which could limit your ability to get a secured business loan. An unsecured business loan eliminates the need to do so and could be a more viable option for those that have been established more recently. Check out our article on start up funding options.

The main disadvantage is that the lack of secured assets and increased risk for the lender result in higher interest rates, tighter repayment timelines, and potentially smaller loan amounts available.

Keep in mind though that this varies depending on the lender and their underwriting process – iwoca’s Flexi-Loan uses real-time data from your business to quickly and automatically assess your business’s lending potential without the need for securing assets.

How much can you borrow with an unsecured business loan? 

The amount you could get is also tied to the lender’s policy and risk appetite. For example, at iwoca we usually offer up to 10% of your annual revenue, in the limit of £500,000. 

To get a large business loan without collateral, it’s best to show that you have a strong cash flow and lots of experience trading. Also, your balance sheet should show you can easily repay the loan. If your credit history is less than ideal, it’s important to provide evidence of a consistent growth trend.

Types of unsecured business loans

There are a few different types of unsecured business loans, each suited to varying situations. Some examples include:

• Fast business loans: short-term business loans that you can get quickly. They’re typically used to cover unexpected or emergency expenses like broken machinery.

• Small business loans: if you don’t need to borrow much a small business loan may be all your business needs to get through a rough patch.
• Large business loans: usually for businesses that are looking to expand and invest in growth. You may need a strong credit history and good cash flow to qualify for this type of unsecured loan.
• Invoice financing: a way to get cash immediately for your unpaid invoices. The lender will give you a percentage of the invoice value upfront and then you can repay them once your customer has paid you. Invoice financing is ideal for businesses that are waiting on a payment from a customer. With iwocaPay, your customers can choose to pay upfront or spread their payments across 3 monthly instalments (subject to approval).‍

How to get an unsecured business loan

If you're wondering how to get unsecured business loan funding, don't worry, the application process is usually simpler than that of a secured loan.

1. When you’re applying, you’ll need to give your personal and financial information, including your credit score, annual income and existing debts. 
2. The lender will use this information to determine whether you’re a good candidate for an unsecured business loan.
3. You’ll also need to give information on the amount of money you want to borrow and how much time you need it for. This is important because different lenders offer different repayment terms, interest rates and fees.

Once you’ve completed your application, the lender will assess it and decide whether or not they want to approve your request. If approved, they’ll contact you with details on how much money you can borrow and what the repayment terms are.

Is there a personal guarantee on an unsecured business loan? 

It’s likely that lenders ask you to sign a personal guarantee to secure the loan. The applicant, often the business owner or Director, must personally repay the loan if the business fails. 

This is a safety net for the lender but also helps SMEs access finance. In simple terms, although the loan isn't backed by business assets, your personal assets (like your house or savings) could be in danger if you don't pay back the loan. Always shop around for the best product and don’t hesitate to seek legal advice before signing a personal guarantee.