An unsecured business loan is a type of loan specifically designed to help businesses rather than individuals. Whether you are a sole proprietor or a limited liability company, these loans can help meet your business needs. These loans are called “unsecured” as they do not require you to put up any valuable assets of your company.
Getting an unsecured business loan is not challenging at all. Bear in mind that your business must be registered for a period of at least six months with a minimum turnover of up to £5,000. You will have to submit the following documents as well:
- Trading statement of previous six months
- Personal and business credit score (business credit score is a must when you are registered as a limited liability company)
- Recent profit and loss statement
- Personal guarantee from a director
There is no fixed sum of money you can take out by filing an application for unsecured business loans from a direct lender. The borrowing amount may vary between £5.000 and £500.000 depending on your credit score, your business’s financial situation and the history of your business success.
What Kind of Unsecured Business Loans Do You Have to Consider?
There are various types of unsecured business loans. Each alternative has its own specific feature and benefits. Use them only if they fit your needs and financial circumstances.
1) Merchant Cash Advance
A merchant cash advance is a small type of funding ideal for small businesses that need immediate access to capital due to a lack of cash flow. A merchant cash advance company will provide you with a lump sum capital in exchange for a share in your future sales. It means you will use your future sales to repay the debt plus the fee.
Merchant cash advance repayments can work in two ways – debit/credit card sales or fixed withdrawal from a bank account. In the case of the former method, you will pay off a fixed percentage of your debit card/ credit card sales until the amount is paid back in full.
In case of a second payment option, a fixed sum will be charged from your account regardless of how many sales you make. Merchant cash advances can be very expensive. It is always recommended that you use other small business loans.
You can use merchant cash advances for repairs, funding working capital, buying new machinery, and IT investments and upgrades.
2) Revolving Credit Cards
Lenders provide the revolving credit facility to help businesses that often struggle to maintain the desired level of working capital. A lender will issue a credit card with a set limit, usually based on your business’s finances.
You can charge whatever amount you want to and will be required to pay back the interest only on the balance to be cleared. If you have already cleared half of the amount, you will be paid interest only on the rest half balance.
Since this is a revolving credit, you are free to charge the money to the account you have already paid. You can carry over a balance from month to month. You will make a minimum payment to avoid fees.
In a nutshell, it is a line of credit that remains available over time, even if the balance is paid in full. This line of credit is suitable for any type of business, especially facing unexpected cash problems.
In addition to cash flow problems, you can use these loans to develop new products, hire new staff, and pay business emergency expenses.
3) Business Overdraft
A business overdraft is a credit to your business bank account. It allows you to withdraw more money than you have in your account. Overdraft charges will be levied on the overdrawn balance until you pay it back.
It is crucial to note that bank overdrafts can be expensive because interest rates will be levied by the day. It is always suggested that you clear all your balance as soon as possible. At the time of using a bank overdraft, you should be cautious of your repaying capacity.
Although these loans are readily available, you should avoid overdrawing funds. Overdrafts are generally recommended during cash flow problems and unexpected one-off costs.
4) Guarantor Business Loans
The aforementioned alternatives can prove to be very expensive. Before you consider them, make sure you have analysed your repaying capacity. There is no point in considering these funding sources if you are doubtful about your repaying capacity.
Chances are you cannot afford these alternatives, and you need money to fund your working capital. In this situation, you can take out guarantor business loans. These loans are an unsecured business, with the only difference being that you will have to arrange a guarantor.
When the sum of money is large, a lender may ask you to arrange a guarantor. It can be anyone – your spouse, family member or friend. When you have a guarantor, you will be able to borrow a larger sum.
You can use these loans to meet any of your business expenses. In addition to working capital, you can use these loans to hire people, buy new machinery, pay off other outstanding business debts, and the like. These types of loans are suitable for all types of businesses.
The Bottom Line
Unsecured business loans can fund a lot of business expenses. Whether you need a small funding source or a large funding source, you can use these loans to meet your needs. There are various types of unsecured business loans, and each one of them has its own features, pros and cons.
Before you use these loans, you should carefully examine whether they will help you achieve your goals and meet your business needs. Unsecured business loans are generally used to meet working capital.
Business loans can be expensive, so it is always suggested that you borrow money only when your business needs money for unavoidable circumstances. You can take advice from your accountant as well when you are unable to make a decision about a funding source.
