Unsecured Business Loans

What is an unsecured business loan?

An unsecured business loan is borrowing that is not tied to a specific asset, usually supported instead by a personal guarantee from directors. The lender has no charge over property, vehicles or stock. If the business stops paying, the lender's remedies are to pursue the company through the courts and, where a guarantee was given, to pursue the director personally.

Because the lender takes more risk than with secured business loans, it charges more and lends less. In return the process is faster and the business keeps its assets unencumbered.

Typical amounts, terms and speed

Unsecured business loans in the UK generally run from around £5,000 to £500,000. Terms range from six months to five years, with one to three years the most common.

Speed is the main attraction. With bank statements supplied through open banking, a decision can arrive the same day and funds within a few working days. That is useful for a genuine opportunity, and dangerous when it lets a business borrow before working out why it is short of cash.

How lenders assess an application

• Bank statements. Usually three to six months. Lenders look at average balances, regularity of income, bounced payments and existing loan repayments.
• Accounts. The latest filed accounts and, for larger loans, management accounts, to confirm the business is profitable enough to afford the repayment.
• Credit history. Both the company's record and the directors' personal records, including County Court judgments and missed payments.
• Trading history. Most lenders want at least six to twelve months, some two years.
• Existing borrowing, and whether the new repayment fits alongside it.

Personal guarantees explained

A personal guarantee is a contract in which a director promises to repay the company's loan personally if the company does not. For an unsecured loan to a limited company it is close to universal, because otherwise the lender's claim stops at the company's own assets.

Three features deserve attention. The guarantee may be unlimited, covering the whole debt plus interest and costs. With several directors it is usually joint and several, meaning the lender can pursue any one of them for the full amount. And it may cover future borrowing from the same lender. A guarantee can be enforced against savings, investments and, through the courts, a director's home. Our personal guarantees page covers what to check before signing and what happens if one is called.

Fixed or variable rate

Most unsecured business loans carry a fixed rate, so the repayment is the same every month and the total cost is known at the outset. Variable rates, which move with the Bank of England base rate, are more common on revolving facilities and overdrafts. They may be cheaper if rates fall and more expensive if they rise.

APR versus flat or factor rates

An APR, or annual percentage rate, expresses the total cost of credit including fees as a yearly rate on the reducing balance. It is the figure that allows two loans to be compared on equal terms. A flat rate applies interest to the original amount for the whole term, ignoring that the balance falls as you repay, so a 10 per cent flat rate is roughly a 20 per cent APR.

A factor rate, used by merchant cash advance and some short-term loan providers, is a multiplier. Borrow £20,000 at a factor of 1.25 and you repay £25,000 regardless of how quickly. The shorter the repayment period, the higher the equivalent APR. Always ask for the APR or the total repayable in pounds. Our guide on how to compare business finance offers works through the arithmetic.

Using an unsecured loan to consolidate

An unsecured term loan is the most common vehicle for business debt consolidation, replacing credit cards, a merchant cash advance and short-term loans with a single repayment. It works where the new rate is lower than the blended cost of the old debts and the term is not stretched so far that total interest climbs. It fails if the freed-up cards are run up again.

Documents usually needed

• Three to six months of business bank statements or an open banking connection
• Latest filed accounts
• Management accounts for larger amounts
• Director identification and proof of address
• A list of existing borrowing and the purpose of the new loan

What does an unsecured business loan cost?

Interest is the main cost and is higher than for secured lending. Arrangement fees of a few per cent are common and often deducted from the advance. Some lenders charge early repayment fees or require all the scheduled interest even if you settle early, which matters if the loan may later be refinanced. Introducer or broker fees must be disclosed before you commit.

Benefits and drawbacks

When secured borrowing may be cheaper

If the business or a director owns property with equity, a secured loan will usually offer a lower rate and a longer term. For a large consolidation the interest saving can outweigh valuation and legal costs, but the property becomes the lender's fallback. Our article on secured vs unsecured business finance sets out how to weigh the two.

Regulated and unregulated agreements

Loans of £25,000 or less to sole traders, partnerships of two or three people and other unincorporated businesses are regulated under the Consumer Credit Act. The lender must hold Financial Conduct Authority permission and the borrower gains statutory protections. Loans to limited companies and LLPs, and larger loans to sole traders, are generally unregulated, so the borrower relies on the contract itself. Read it in full.

Alternatives to consider

• A cash flow finance facility that can be drawn as needed rather than taken as a lump sum.
• Invoice finance where the shortfall is caused by slow-paying customers.
• Refinancing an existing loan rather than adding a new one.
• Free, impartial advice from Business Debtline if the business cannot meet its current commitments.

Frequently asked questions