Compare The Best Unsecured Business Loans For UK Businesses

Is a personal guarantee required?

Yes, a personal guarantee is a common requirement for an unsecured business loan. Should you fail to make repayments within the agreed timeframe, this can lead to personal assets being at risk of seizure and even bankruptcy.

A misconception is that a limited company structure always protects the owner or company directors from being personally liable for business debts. This is true until a personal guarantee is signed, which then erodes the legal separation between owner and business.

An unsecured loan for a limited company without a personal guarantee is possible if the business has exceptional financial health and a strong trading history.

How to get an unsecured business loan?

The process of obtaining an unsecured loan begins with self-assessment and evaluating the business’s needs. Different types of unsecured business loans have varying eligibility requirements, so it’s essential to understand which loan types are not suitable for your application.

Once you have shortlisted the loan types your business may qualify for and would meet your lending needs, you need to check the eligibility requirements of the specific lenders offering this loan type.

A broker is often the best way to find and secure an unsecured loan. A good business loan broker should have access to an extensive range of lenders, some of which may not be available if you approached the lender directly. They should also know what type of loan you are likely to be approved for after assessing your business.

What are the different types of unsecured business loans?

Term loans: Term loans are a traditional lending agreement where a fixed sum of money is borrowed for a fixed period of time. An interest rate is agreed upon, and repayments are made on a regular basis (typically monthly). This is easy to budget for, but has less flexibility for changing needs.

Fast, short-term business loans: Modern, fintech lenders have optimised this product for speed. Loan applications are streamlined and automated through simple online forms, allowing cash to be released within one to two business days. Examples include Iwoca, Fleximize, and LoveFinance.

Revolving credit facility: This works like a pot that you can dip into. A credit limit is agreed upon (for example, £50,000), and you can use it as needed. You only pay interest on what you have drawn down and for the number of days until repaid. This is ongoing, and there is often a fee for non-utilisation.

Business overdraft: An overdraft allows you to overspend on a specific bank account. It’s a short-term safety net, with interest accrued on the overdrawn amount on a daily basis. There is typically no fee for non-utilisation.

Business credit card: A business credit card is a means of accessing credit through card purchases, whether online or in person. This helps track business and employee spending. A set credit limit is agreed upon, and it works similarly to a personal credit card, often with spending rewards. If you clear the balance each month, you typically won’t be charged interest.

Merchant cash advance: A merchant cash advance is a lump sum of cash, similar to a loan, but it’s repaid automatically as a percentage of future card sales. A percentage is agreed, and this is applied to all card transactions until the merchant cash advance is fully repaid. It’s automatic, so there’s no risk of missing repayments, and repayments align with business performance.

Which bank loan alternative is right for me?

Choosing the right loan depends on your urgency, revenue model, and the amount you need to borrow.

For a one-time injection, a fast online loan can help capitalise on new opportunities, such as boosting retail stock for a popular product, or help out in an emergency, like replacing a broken oven in a bistro cafe. In both instances, you need proof of positive cash flow and to be comfortable with regular repayment terms.

For companies struggling with their cash flow due to unexpected costs, a revolving credit facility can be a helpful option. Here, you can take what you need, when you need it, and repay it when you have the means (but hopefully quite quickly, as it’s an expensive loan). A business overdraft can achieve a similar thing but on a smaller scale, such as a struggling, low-revenue phone repair shop.

A merchant cash advance has some unique use cases, such as overcoming low seasonal sales periods. Companies with strong card sales can usually secure favourable terms. While it’s expensive, it offers peace of mind, making it also great for lifestyle businesses that don’t want the stress of meeting repayments.

How much can you borrow with an unsecured business loan?

Unsecured business loans typically range from £1,000 to £750,000. Online lenders often cover the full range of this, while bank loans may be slightly more conservative. With these two options, it heavily depends on the application (financial health, creditworthiness, etc.)

Revolving credit facilities and merchant cash advances also operate in a large range, between £2,000 and £250,000.

Business overdrafts and credit cards both have a smaller range of financing available, typically between £500 and £50,000.

Who are unsecured loans for?

A secured loan is typically preferred if the business can afford the longer application process, as they are generally more affordable. However, not all companies have the time or enough assets required as collateral. This means that unsecured loans are often for working capital, which means paying staff on time, buying new supplies to fulfil sales, and investing in marketing. This borrowed money helps maintain or increase sales, along with meeting other liabilities.

Unsecured loans can be utilised by larger companies to execute a management buyout or merger, or to finance growth projects and costly marketing campaigns. This is typically found in tech and other sectors where assets that can be used as collateral are scarce.

Will I be charged any other fees?

There are more fees to consider than just interest. Depending on the lender and product, you could be charged for:

• Early repayment fees: Paying off a loan early can help reduce the total interest paid, depending on the loan terms. However, some lenders will charge early repayment fees, typically around 1-2% of the remaining balance, to offset the interest lost due to early repayments.
• Late repayment fees: A penalty for missing a repayment deadline. Often around £50.
• Arrangement fees: This is an administrative fee for organising and underwriting a loan. It can often be paid upfront or added to the loan.
• Annual fees: Common with credit facilities and credit cards, where a yearly fee is paid for maintaining access to your pool of credit.
• Legal fees: These can be incurred with more complex lending products.

What should businesses consider before applying for an unsecured loan?

While it’s important to verify eligibility before applying for any unsecured loan, the more crucial assessment is determining affordability. Between borrowers and lenders, there is asymmetric information (you know more about your situation than the lender). Therefore, approval doesn’t always equate to being affordable.

Assessing the total cost of credit can help you decide between lenders, but it’s also important to scrutinise the repayment structure and associated fees. Will the loan provide a positive return on investment? If it’s not for growth but survivability, is the loan only delaying insolvency or acting as a more permanent remedy? You must confront the reality of being a personal guarantor.

Finally, consider how urgently you need the funding. You don’t want to unnecessarily get rejected by rushing applications, as this can harm your credit score, nor do you want to rule out a bank loan if there’s a likelihood of approval.

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