No collateral? Here's how unsecured business loans work

When cash flow is tight or a shiny new gadget is on the wishlist, many small businesses wonder whether they’ll be approved for finance.

Most business loans require collateral to secure against the loan, meaning that if you default on your loan, your lender will take that collateral and use it to cover any losses incurred. Collateral often takes the form of a property, vehicle, or piece of equipment.

But what if you don’t have these assets on hand or your vehicle is already being financed? After all, not every small business has the luxury of working in their own office space or with their own equipment. These things take time, and you have to start somewhere.

That’s where unsecured business loans come in. Let’s look at how they work, and more importantly, how they could help boost your business.

What are unsecured business loans?

An unsecured business loan is similar to any other business loan, with one key difference: collateral is not required as security. Lenders determine how trustworthy you are based on past financial habits—they’ll look at your credit history and whether you’ve been able to make repayments on time and in full.

If you have a good credit score, you’ll likely have a higher chance of getting approved for your unsecured business loan, assuming you’re eligible. In addition to assessing your credit history, a lender will request your transaction history and potentially other documents such as financial reports.

Upon approval, a personal guarantee is usually required. Essentially, this is a promise made by the borrower that they (usually, the directors of the business) will be personally liable in the event of default.

But without collateral, there’s still a high risk involved for your lender in allowing you to borrow money, no matter how good your financials or credit history may be. Because of this added risk, you’ll likely face higher interest rates. This is something to consider before taking out an unsecured loan, although for many businesses, the reward is worth the risk.

The cost of not doing anything could be greater than dealing with the issue at hand—whether that’s improving cash flow or making an investment that will grow your business over the long run.

Common uses for an unsecured business loan

Unsecured business loans can be used for any business-related needs, such as:

• Improving cash flow
• Purchasing a new property or asset
• Renovating your space or moving to a bigger or better space
• Upgrading tech or other equipment
• Purchasing inventory
• Expanding your product offering
• Improving productivity
• Covering day-to-day operational costs
• Creating and optimising marketing campaigns
• Building out a new website
• Hiring new staff or resources
• And much more!

How much can you borrow for an unsecured loan?

This will depend on factors like your lender's policy, your creditworthiness, your revenue and cash flow, and your business plan. With Valiant, though, you can access $5,000 to over $500,000.

The pros and cons of unsecured business loans

Unsecured lending may not be the right choice for every business, so it's important to carefully consider both the benefits and the drawbacks:

The pros

• You don’t need to offer any collateral. The most evident benefit of getting an unsecured business loan is that it doesn't require security, which means it is more accessible to business owners who may not have valuable assets to offer.
• Clear repayment terms. Unsecured loans often come with fixed interest rates and set repayment schedules, which can make it easier for business owners to plan their finances and budget for loan payments.
• Minimal paperwork needed to apply. Since there is no need to appraise collateral, applying for an unsecured loan generally requires less documentation, making the whole process a lot simpler.
• Can be used for a variety of business needs. As we touched on before, unsecured loans are often quite flexible, and you can use them for a wider range of purposes than other financing options.
• Fast approval and funding process. Since there's minimal paperwork required and no need to evaluate collateral, the approval process for unsecured finance is typically quicker.

The cons

• High interest rates. Since there's no collateral, lenders tend to charge higher interest rates as a way to offset the increased risk.
• Available for short timeframes. Lenders may limit the duration of your loan, so you may have to repay it in a shorter period, which can put a strain on your cash flow.
• May require director’s guarantee. This means that you, as the owner, will be personally liable for the debt if the business fails to meet its obligations under the loan agreement.
• Often have setup or ongoing fees. This could setup fees, monthly maintenance fees, and drawdown fees, all of which can easily inflate the cost of your loan.

Unsecured loan alternatives for new businesses

As a start-up or new business, you might not have access to collateral for a secured business loan. This creates a chicken-and-egg problem because while you have to start somewhere, you also need money to make money.

While it’s harder to qualify for funding as a start-up, there are a few options that might suit you:

1. See if you qualify with an alternative lender

Business loans from banks are traditionally harder to qualify for. By going through a non-bank or alternative lender, you cut through most of the red tape and benefit from more lenient approval criteria. Of course, higher interest rates are usually involved, but that’s the trade-off until you’ve grown your business, in which case you could look into refinancing your business loan.

2. Turn to family and friends

If your startup idea is truly great, it shouldn’t be difficult to get family and friends on your side. Their support could be the difference between getting your business off the ground or having it dwindle into a missed opportunity.

Set up a short-term finance arrangement or partner up with like-minded friends, family members, or acquaintances. You might even find a great business partner in the process, willing to bridge gaps in your skillset for a share in your business.

3. Save as much as you can

Many startup and small business owners get their companies off the ground with their own hard-earned dollars and personal assets. If you have equity within a property, savings, or other valuable assets, you’re already off to a head start. If not, start putting money aside into a savings account while you brainstorm ideas and develop your business plan.

4. Get investors onboard

Crowdfunding is another option. Connect with like-minded investors who see potential in your idea. They’ll help you kickstart your business, and many of them will be interested in sharing their skillset as well. After all, the success of your business is in their best interest.

Tips for a successful unsecured loan application

If you're ready to apply for unsecured finance, here's what you can do to make sure you have the best shot at approval:

• Get your credit score where it needs to be. Your credit history is important to lenders when they’re considering offering unsecured funds to you—without assets, they’re dealing with a higher level of risk. A poor or even average credit score raises red flags.
• Start small. Paying off a personal credit card can build trust and instill confidence in lenders while giving your credit score a boost.
• Make repayments on time. Woo your lender with a great track record of managing personal finances. This proves you’re responsible and increases your creditworthiness.
• Get paperwork together ahead of time. Lenders will ask to see your financials, including your balance sheet and bank statements, so make sure you have it all ready.
• Speak with a lending expert. If you’re worried or have questions about your eligibility for unsecured finance, you can chat to a lending expert free of charge. Applying for finance when you’re unsure of your chances risks damage to your credit score. Our experts can check what you qualify for before starting an application—better to be safe than sorry!

With 100+ years of combined experience in business lending, our experts are trained to help you find and apply for the right finance, even in difficult situations or unique scenarios. Get started today!