What Is an Unsecured Business Loan?
Updated: Aug 17
An unsecured business loan allows a company to borrow money without providing a specific business or personal asset as security for the loan.
For many established SMEs, unsecured lending can provide relatively quick access to working capital or funding for investment without the valuation and legal processes commonly associated with secured lending.
However, “unsecured” does not necessarily mean that the lender has no protection if the business fails to repay the loan. In particular, lenders may require directors or shareholders to provide personal guarantees.
Understanding that distinction is important when considering whether an unsecured business loan is right for your company.
How does an unsecured business loan work?
With a typical unsecured business loan, the lender advances an agreed amount directly to the business.
The company then repays the borrowing over an agreed period, together with interest and any applicable fees.
For example, a business might borrow £40,000 over 24 months and make regular monthly repayments.
Depending on the lender and product, repayments could instead be weekly or follow another agreed schedule.
Unlike a secured loan, the lender doesn't normally take a specific charge over a property or other particular asset as the primary security for the facility.
This can make the application and completion process considerably simpler.
What can an unsecured business loan be used for?
Businesses use unsecured loans for many different commercial purposes.
Common examples include:
working capital;
purchasing stock;
buying equipment;
refurbishment;
marketing;
recruitment;
funding expansion;
supporting a new contract;
managing seasonal cash-flow requirements; and
other business investment.
The lender will normally want to understand what the money is being used for.
A clear commercial purpose can also help the lender assess whether the amount and repayment term requested make sense.
How much can I borrow with an unsecured business loan?
The amount available varies significantly between lenders and businesses.
A lender is likely to consider factors including:
turnover;
recent cash flow;
profitability;
trading history;
existing borrowing;
credit history;
bank conduct; and
the proposed repayment term.
For short-term business lending, a broad rule of thumb is that maximum borrowing may sometimes be around one to two months of average business revenue.
That is only a starting point.
A company generating £50,000 a month doesn't automatically qualify for a £100,000 unsecured loan. If it already has significant borrowing or limited free cash flow, the amount it can comfortably support may be substantially lower.
Longer repayment terms can sometimes support larger facilities because the principal is being repaid over a longer period.
You can read more in our guide to How Much Can My Business Borrow?
What does a lender look for when assessing an unsecured loan?
Because there isn't a specific asset securing the loan, the financial strength and cash generation of the underlying business are particularly important.
The lender is primarily expecting to be repaid from the company's normal cash flow. It may therefore review information such as:
Turnover. Is the business large enough to reasonably support the requested borrowing?
Cash flow. Is sufficient cash being generated to make the proposed repayments?
Existing debt. How much is the business already paying to other finance providers?
Bank conduct. Are balances relatively stable? Are payments being returned? Is the business constantly relying on an overdraft?
Trading history. How established is the company?
Profitability. Is the underlying business financially sustainable?
Credit history. Are there CCJs, defaults or other adverse credit issues that need to be considered?
The lender will normally look at these factors collectively rather than relying on one number in isolation.
Do I need assets to get an unsecured business loan?
You don't normally need to offer a particular asset as security.
That can make unsecured lending suitable for businesses that don't own significant property or other assets that could readily be used as security.
However, the lender still needs to establish that the company has sufficient financial strength to repay the loan.
For unsecured lending, cash flow and affordability therefore become particularly important.
Do unsecured business loans require a personal guarantee?
They often do, particularly when lending to owner-managed limited companies.
A personal guarantee is a legal commitment made by an individual, typically a director or shareholder, under which they may become personally liable if the company fails to repay its debt.
This is different from taking security over a specific asset.
For example, a lender could make an unsecured loan to a limited company while also obtaining a personal guarantee from its director.
The loan is therefore unsecured at the company level in the sense that no particular company asset has been pledged, but the lender still has additional recourse under the guarantee.
A personal guarantee is a significant legal commitment and guarantors should understand the obligations they are accepting.
We'll cover this in more detail in our guide to What Is a Personal Guarantee on a Business Loan?
Are unsecured business loans quicker than secured loans?
They can be.
One of the main advantages of unsecured lending is that there is generally no need to value and take security over a particular asset.
Property-backed lending, for example, may require valuations, solicitors, searches and security documentation.
An unsecured application can potentially move from application to approval and completion much more quickly.
Straightforward applications can sometimes receive a lending decision on the same business day, although actual timescales depend on the lender and circumstances of the application.
You can read more in How Long Does It Take to Get a Business Loan?
What information will I need to provide?
Requirements vary between lenders, but an established business may be asked for information including:
basic company and director details;
amount and purpose of borrowing;
recent business banking information;
details of existing finance;
filed or management accounts where appropriate; and
identification information for directors or guarantors.
Open banking can make the process quicker by allowing the lender to access relevant banking information electronically with the business's permission.
For a fuller explanation, see What Documents Do I Need to Apply for a Business Loan?
What are the advantages of an unsecured business loan?
For the right business, unsecured lending can offer several advantages.
Speed
The absence of asset valuations and extensive security documentation can make the process relatively quick.
Simplicity
The legal and administrative process can be more straightforward than secured lending.
No specific asset required
Businesses that don't own property or significant fixed assets can still potentially obtain finance.
Flexible use
Unsecured loans can potentially be used for a wide range of legitimate commercial purposes.
These characteristics make unsecured lending particularly useful for established SMEs requiring relatively straightforward access to additional capital.
What are the disadvantages?
There are also trade-offs.
Loan sizes may be smaller
Without specific asset security, lenders may be less comfortable providing very large facilities.
Interest rates may be higher
The lender is taking greater credit risk than it might with a well-secured facility, which can be reflected in pricing.
Personal guarantees may be required
Directors or shareholders may be asked to accept personal liability if the company fails to repay.
Repayment periods may be shorter
Some unsecured products have considerably shorter terms than secured facilities, resulting in higher regular repayments.
The right comparison therefore isn't simply whether one loan has a lower interest rate.
Businesses should consider loan size, term, repayment amount, total cost and security requirements together.
Unsecured vs secured business loans
The fundamental difference is security.
With a secured business loan, the lender takes security over a specific asset.
With an unsecured business loan, the lender primarily relies on the creditworthiness and cash flow of the business, potentially supported by personal guarantees.
Neither structure is inherently better.
A business seeking £25,000 of working capital quickly may find unsecured lending more appropriate.
A company seeking a substantially larger amount over several years and with suitable assets available may benefit from secured finance.
The appropriate structure depends on the business and what it is trying to achieve.
Can I get an unsecured loan if my business has bad credit?
Potentially.
Different lenders have different credit appetites.
A historic CCJ, default or other adverse credit event doesn't necessarily prevent a company from obtaining unsecured finance.
The lender is likely to consider when the problem occurred, its severity, whether it has been resolved and how the business has performed subsequently.
Recent adverse credit combined with deteriorating cash flow is likely to be viewed differently from a historic issue followed by several years of satisfactory trading.
Is an unsecured business loan right for my business?
An unsecured loan may be worth considering if your business:
is established and generating regular revenue;
requires funding relatively quickly;
has sufficient cash flow to support repayments;
doesn't want or isn't able to provide specific asset security; and
has a clear commercial reason for borrowing.
The important question remains affordability.
A loan that can be arranged quickly is only useful if the business can comfortably support the resulting repayments.
Unsecured business loans from Adelpha Capital
Adelpha Capital provides unsecured business loans to established UK SMEs.
We assess applications individually, considering the wider financial position of the business, including turnover, cash flow, recent bank conduct, trading history and existing borrowing.
If you're looking for an unsecured business loan, you can apply online or contact the Adelpha Capital team to discuss your requirements.