It’s difficult and can be challenging for any startup founder to get started with their business from scratch. The problem becomes more aggravated due to a paucity of funds. In fact, first-time entrepreneurs and startup founders often face challenges in managing their day-to-day business operations when they run short of money. In such a case, an unsecured business finance loan can be a helpful solution to them.

The term ‘unsecured loan’ is self-explanatory per se. It refers to the amount of money that a startup founder or firm owner can borrow from a lender without providing any collateral. Startup founders who begin their businesses without angel investment often prefer unsecured finance loans for their flexibility and prompt processing.

Suppose you run a startup and wish to take an unsecured loan. In that case, you can reach out to a lending institution that provides such loans. At the time of filling out your loan request at the lender’s office, you won’t be asked about your property or assets. This type of loan is also called a collateral-free loan, and the chances of getting your loan request approved depend on your credibility and reputation.

When you approach the lending institution seeking an unsecured business loan, you won’t have to offer your property or assets as collateral. This is also referred to as a collateral-free loan, offering greater flexibility in business operations while taking the least possible time for approval.

Types of Unsecured Business Loans

Lending institutions and financial organisations often provide different types of unsecured business loans to borrowers as per their norms and terms and conditions.

Let’s have a look at them!

Complete Unsecured Loan: The complete unsecured loan or 100% unsecured loan means the same. It refers to the amount of loan money offered by the lender to the entrepreneur without keeping any assets or security as collateral. Since the lender gives you the entire amount of the loan without any collateral, in case you default for any reason whatsoever, he may not be able to recover the money from you. However, you might face legal actions.

If you don’t repay the loan in time, the lender may file a civil suit to recover the loan money from you at a court in the UK, which can be detrimental to your business, creditability, and reputation.

Unsecured Loans without Any Tangible Assets: In some cases, the lender grants unsecured financial loans to an entrepreneur without attaching any tangible assets but such loans stay attached to the borrowers’ business cash flow. If you seek such a type of unsecured loan, don’t forget that if you default, the lender can sell your business as a going concern and recover the outstanding debt from you.

Based on your needs and the lenders’ practice, you can be granted any of these types of loans. It should be noted here that all unsecured business finance loans are provided for a shorter period and attract a high rate of interest.

Invoice Financing: In addition to the above two types of unsecured loans, there is another arrangement that your lender might suggest—invoice financing. Here, the lender offers you a percentage of the invoice value as soon as you furnish your loan request. You can repay the loan amount when your customer has fully cleared the invoice amount. It’s ideal for startups that are yet to receive payment from a customer and the invoice amount is pending at the time of seeking unsecured loans.

How Can You Obtain an Unsecured Loan? 

When you seek an unsecured loan, you need not pledge any asset for it. It is one of the flexible business financing options for startups and entrepreneurs who urgently need money for their day-to-day business operations.

Interestingly, the lender doesn’t scrutinise your loan application or request based on the assets you own. Instead, they will closely check your credit score, past borrowing history, financial transactions carried out by your business in the last few preceding months, and your firm’s cash flow statement. 

As soon as the unsecured loan is approved, the lender will personally discuss the necessary terms and conditions along with interest rate, tenor of the loan, annual percentage rate to be charged, and late fine, if applicable.

Considering their flexibility and simplified repayment terms, unsecured loans are often considered as the cost-effective and easiest way of obtaining loan amounts.

Unsecured Loans vs Secured Loans

Some business firms also go out to obtain secured loans for small business funding instead of unsecured loans. However, under such a case, the borrower gets the loan money only against collaterals like plant and machinery, commercial property or vehicles. Secured loans are also called business mortgages.

Key Differences

Thus, startups and small businesses always prefer seeking unsecured loans to secured loans. Though it attracts a higher rate of interest, at least the business owner gets the loan money in just a few days.

Advantages of Unsecured Loans at a Glance 

No collaterals: A startup owner or entrepreneur doesn’t require any collateral at the time of seeking unsecured loans from the lender. In such a case, the creditworthiness assessment of the borrower plays a key role. An entrepreneur with a good reputation and proven track record in repaying past loans is likely to get the loan in the least possible time.  

Less Risk to Collaterals: Since an unsecured loan is granted without attaching the firm owner’s property in case of default, the borrower doesn’t have to worry about losing his property or any other assets. However, the lender is free to file a civil case against the borrower at any UK-based court.

Quick and Easy: As soon as the borrower’s loan request is received the borrower starts working on it. He or she doesn’t need to assess any collateral.  Instead, they just check the borrower’s business records, including monthly sales, balance sheet, cash flow statement and other relevant details. It takes less time and the amount of loan is quickly disbursed.

Who Needs Unsecured Loans 

Unsecured loans are primarily given to small businesses and startups scattered all across the UK. Since these businesses are either new or have a limited area of operation, they are likely to operate with fewer assets.

Especially in the case of businesses that deal with SaaS or other service-based solutions, the owners require unsecured loans from time to time to meet their needs for working capital.

How to Use Unsecured Loans 

Meeting Working Capital Requirements: Businesses that launch their startups or business firms with limited capital, need a regular flow of funds to meet their working capital requirement. Usually, they seek unsecured loans from the lender to meet such a requirement.

During Mergers and Acquisitions: During a change of guard at the top leadership of any firm that we usually see during M&A of any firm, the firm may need unsecured loans to meet the unforeseen expenses that come with the merger and acquisition operations.

In Case of Management Buyouts: Though management buyouts don’t happen overnight, they may happen in case the management of a newly-launched startup buys the ownership of the firm within a few months of its launch.

Thus, the management takes control of the business and may need unsecured loans to bridge the funding gaps when equity investment is insufficient for such a purpose.

Buying New Business Assets: Unsecured loans are also used by startup founders and small business owners to invest in new business assets. It can be anything, including renovation of the office to buying computers, printers, or any other machinery.

Factors to Consider Before Seeking Unsecured Loans

Any loan is treated as a business liability. It’s essential for a business owner to seek a loan only when other options have failed. Whether you are seeking secured loans or unsecured loans, they carry some amounts of risks.

You should take utmost caution before deciding on the amount of unsecured loans that you wish to borrow from the lender. Don’t draw any figures arbitrarily. There should be a valid rationale behind deciding the loan amount. Besides, you’ll also have to repay the loan amount each month in the form of EMIs (Equated Monthly Instalments).

So, you should be sure about how much you will be able to repay each month and spare for this purpose out of your business income.

Another important fact is how will you utilise the loan amount—will you use it for Business expansion financing or just to meet your working capital requirements?

Loan Application Requirements: Things to Keep in Mind 

Loan amount: Though the actual amount of unsecured loans that you can seek depends upon the lender and your requirement, it is typically limited to £25,000 only.

Loan Application: Your loan application should be complete in all respects. Provide all essential information and give honest answers. Don’t hide any relevant information otherwise, it’ll greatly impact your business credit history in future.

Some of the information that you should include in your application form includes the loan amount that you wish to borrow, repayment terms, amount of your current business debt, business income, ARR (Annual Recurring Revenue), if the business is a few years old, Profit and Loss of the business for the current year, if any, along with other key details.

Guarantor: In addition, you also need a guarantor who signs the agreement papers alongside you, with an undertaking that if you can’t repay the amount of the unsecured business loan amount, the same will be repaid by him or her.

Once the application form is correctly filled in, the lender will analyse the information along with other officials. If they feel you’re the right candidate for unsecured loans, they might contact you with more details.

In Conclusion

Unsecured loans can be a helpful solution for businesses that are in urgent need of money. Though an unsecured loan comes with a degree of financial flexibility, startup owners and business founders should seek unsecured loans only when they can’t get any help from alternative lending solutions, including crowdfunding, government grants and loans, seeking help from family and friends, microloans, business credit cards, and angel investment.

Though unsecured business loans come without collaterals, any default or excessive delay in repaying the borrowed amount could attract legal action and badly tarnish the image of the business and its owner.