Disadvantages of unsecured business loans

It all comes down to risk and return. When the lender is carrying more risk, they will expect a higher yield, and so the interest rates on unsecured loans tend to be higher than those on secured loans.

However, this is a “buyer’s market” – there are more lenders offering this kind of finance than ever before, and this means borrowers have the opportunity to shop around for the best deal.

When considering the costs, you should also weigh up the potential benefit to your business of the finance, versus the cost. Many borrowers choose speed and convenience over cost so that they can focus on growing their business.

The maximum term that you can repay an unsecured business loan over is 5 years. This is fine for most requirements, but if you are looking to fund a longer term capital expenses, such as a property purchase or refurbishment, then this may be restrictive. A commercial mortgage or secured business loan is likely a better option.

How much does an unsecured business loan cost?

An unsecured business loan will usually come with an arrangement fee and an annual interest rate. Unlike secured business loans, you won’t need to pay valuation or legal costs. Typical lender costs may include:

• Application fee

  Normally added to the loan. Typically around 6% of the loan amount. While higher than for secured loans, this generally allows lenders not to charge any early repayment fees. Some short-term loans may not have an arrangement fee.

• Interest rate

  Normally shown as an annual interest rate. Depending on the lender’s assessment of your business, this typically ranges from 5% to 20% per annum. Short-term loans can have even higher interest rates. See “Business loan interest rates” section below for more detail.

• Other fees

   These can include missed payment fees. Always read the loan contract to check.

Unsecured business loan interest rates

Business loan interest rates vary depending on the lender’s perceive risk profile of your business. All lenders have their own way of assessing your business, but a helpful way to get an idea of what interest rate your business could get is to think in terms of “risk bands”:

• Risk band A: Strong personal credit score, strong business credit score, trading for 5 years or more, good profits, good balance sheet net worth
• Risk band B: Reasonable personal score with only minor issues, reasonable business credit score, trading for 2 years or more, profitable
• Risk band C: Some recent credit issues or weak credit score (missed payments or satisfied CCJs)

Loan term	Risk band A	Risk band B	Risk band C
<1 year	3-7%	8-14%	15-40%
1-3 years	4-8%	9-15%	15-25%
3-5 years	5-9%	10-16%	n/a

These rates are annual, and are for illustration only. Apply now with no obligation to get bespoke offers.

How do I qualify for an unsecured business loan?

This type of loan is based on trust and confidence in the borrower’s business. Those with a solid company credit rating, a strong trading history and good personal credit score will find it easiest to gain access to the best choice of unsecured loan options.

Profitable businesses trading more than 2 years whose owners have personal assets will typically find it easiest to qualify for an unsecured business loan. Even if this isn’t the case there are still lenders that may be able to help.

In most cases lenders will require a personal guarantee, and the strong preference will be that the guarantor will own their home.

How to apply for an unsecured business loan

Applying for an unsecured business loan is generally quick and easy. The best lenders make the process painless. An application should only take minutes, and you should receive a decision often within a day or two. Expect to apply online, and be ready to provide details for:

• Company details, such as trading start date and turnover
• Personal details, such as date of birth and address
• Financial accounts
• 3 months’ business bank statements