For many small businesses there comes a time when they need an unsecured small business loan. Often this is required to fund business expansion, for a specific project, or for purchasing inventory.
With an unsecured small business loan, you are able to borrow money for your business without having to provide security on any assets.
As such loans have a higher level of risk, interest rates tend to be higher than secured business loans.
However, with many lenders, although the loan is unsecured, your lender may require a personal guarantee, so that if your business is unable to repay the loan, you will be personally responsible for repaying it.
Unsecured small business loans from banks
Unsecured small business loans are available from high-street banks but obtaining one is for many businesses likely to be an uphill struggle.
The process has always been difficult for new and unestablished business, but since the last economic downturn, it has become notoriously difficult, though as we describe below various government schemes have been launched to make the process easier.
As mentioned in the introduction, even when a high street bank provides an unsecured small business loan it may require a personal guarantee from the directors or business owners.
This could involve a charge on your house, so should the business default on the loan then you could be placed in a difficult situation with the possibility of losing your home.
In many countries it is possible to obtain an unsecured small business loan through a government backed scheme.
Such loans can be considerably easier to obtain than conventional unsecured business loans. Some examples of these include:
- UK Schemes
In the UK there are many different government-backed schemes where businesses can borrow money to fund start-ups and existing businesses.
Start-up loans are available for up to £25,000 and the current inter4est rate is just 6%. Typically, the loan term is from one to five years and there are no additional fees to pay.
Such loans are available only for businesses based in the UK that are less than two years old.
The Enterprise Finance Guarantee scheme is run by the British Business Bank.
The purpose of the scheme is to make it easier for businesses that have been turned down for a conventional business loan because they couldn’t provide security or had an insufficient trading history even though the business itself is viable.
Essentially the scheme guarantees up to 75% the loan should the business be unable to repay it. These are available only to small to medium business that operate in the UK.
The maximum term is three years and in addition to the interest charged by the lender, an annual premium of 2% of the outstanding capital is also required.
- US Schemes
In the US a range of unsecured business loans are available through the Small Business Association of America (SBA).
General Small Business Loans are available to small businesses that are based in the United States and that have a justifiable requirement for the loan.
Certain kinds of businesses are excluded from the scheme and there are fairly strict requirements on what the loan may be used for, for instance they are not available for refinancing existing debt.
The scheme will guarantee up to 85% of the debt for loans of up to $150,000 and 75% of the loan for higher amounts.
Microloans provide unsecured small business loans of up to $50,000 for business start-ups and to fund business expansion.
Typically, such loans may be used for financing working capital, procuring inventory, plant and equipment, and furniture.
The scheme operates by providing funds to intermediary lenders that operate on a not-for-profit basis. Loan interest rates and terms and conditions are arranged between the business and the intermediary.
- European Union Backed Schemes
EU backed unsecured small business loans are available through the European Commission (EC).
In this model the EC provides small business loans through the financial institutions within the borrower’s country.
Such loans are available to start-ups and businesses of any size. The eligibility of the business for the loan is decided by the local financial institution, of which around 1,000 are members of the scheme.
Should they agree to approve the loan, then the EC provides the funds.
Unsecured small business loans from specialist lenders
Over recent years the business finance sector has grown considerably and diversified. Today there are many different kinds of specialist lenders that operate differently from the high street banks.
Often these loan facilities are used to provide short term loans and usually the interest rates are considerably higher than those charged by the high street banks.
However, the lending criteria tend to be more relaxed and such loans can be arranged quickly, perhaps within just a few days and in some cases even faster than that.
A variety of alternative loan models are also available such as invoice discounting, invoice discounting and merchant cash advance.
Strictly these are not unsecured as the loans are essentially secured through assets such as invoices or repayments directly charged to customer credit card transactions.
Peer to peer unsecured business loans
While just a few years ago peer to peer unsecured small business loans were quite new, today they are a major player in the small business loan market and even high street banks are becoming involved with financing them.
Loans are provided online through peer to peer platforms which work in a variety of ways.
Peer-to-peer lending platform serve to connect borrowers to investors.
While borrowers are able to obtain terms that are comparable to the more traditional lenders, borrowing money is far faster and the criteria tends to be more flexible.
Such schemes are attractive to investors as they can provide excellent returns, though at the price of taking on a higher level of risk.
Typically returns are from 4% to 10%, and investors are able to diversify their lending portfolio to adjust the level of risk. Experienced investors can exceed even these returns.
An important difference between peer-to-peer unsecured small business loans and borrowing from a bank is the way in which credit worthiness is assessed.
While lenders still make use of credit reference agencies, more creative ways are also used.
For instance, online accounts such as PayPal may be used, as might online market places such as eBay and Amazon; your presence on social media might also be taken into account.
The process is streamlined as all of this is handled automatically, so decisions can be made very quickly, perhaps in hours, rather than the several weeks taken by high street banks.
Bitcoin unsecured small business loan
While most peer-to-peer unsecured small business loans are based on Fiat currencies, bitcoin unsecured small business loans are also available through platforms such as Bitbond.
Such platforms have many advantages for both entrepreneurs who need finance for their business and investors who are looking for higher returns.
Obtaining an unsecured small business loan with Bitbond is an easy process and applications are usually reviewed within 24 hours; once you are approved you simply post your loan request on the website where it can be reviewed by lenders.
As the loans are in bitcoins, there is no need for either the investor or borrower to use a bank account, so the high fees associated with conventional banks are avoided entirely.
Borrowers are charged a small fee, but this it is only a fraction of what they would be charged by banks.
Other advantages are that although the loans are in bitcoins, repayments are pegged to the USD which compensates for any volatility in the value of bitcoins.
These loans are also borderless, providing investors with an opportunity for investing in businesses anywhere in the world, while making unsecured small business loans available in countries where otherwise obtaining such loans would be difficult.
At some time in their life cycle most businesses need to borrow money and the most usual route is through an unsecured small business loan which allows you to borrow money without the need to provide collateral.
However, obtaining such loans through conventional banks can be problematic, and often banks require a personal guarantee, which for many means a charge on their property; always a risky move.
As an alternative, various governments and bodies across the world now provide businesses with loan guarantees, which makes unsecured small business loans easier to obtain and avoids the possible pitfall of a personal guarantee.
Such schemes operate through a wide range of lenders including peer-to-peer lending platforms.
Over recent years, peer-to-peer platforms have become increasingly popular amongst entrepreneurs and today such platforms are providing unsecured small business loans to businesses of all sizes.
Bitcoin peer-to-peer platforms are also gaining popularity as they have many advantages for both investors and borrowers and, by making such loans available internationally, they have extended the market considerably.
While at one-time peer-to-peer unsecured small business loans were a fall-back position, today for many entrepreneurs they are now the first port of call.
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