Getting an Unsecured Start Up Loan: What You Need to Know

by Josh Biggs in Finance on 21st April 2021

A start up loan is a loan taken by an individual or group for the purpose of starting a new business or growing an existing one. However, if the purpose of getting it is to fund an existing business, then the business must not be older than 2 years. Otherwise, it is no longer considered a start-up.

Some start up loans, such as that of the British Business Bank, are fully backed by the government of a country while others are funded by organizations and groups. Yet a few are funded by individuals, who either have a direct interest in the business or are looking for indirect investment opportunities. Depending on the source and the type, the interest rate during repayment could be as low as 6% per annum or as high as 17% per annum.

Factors Considered When Assessing Loan Applications

There are 3 main factors that banks and other financial institutions take into consideration before an applicant is deemed fit to get a loan. They are:

The Viability of the Business

How much money will the business you are going into, or already have, generate on a regular basis? Will it be enough to finance the loan and run the business comfortably? And will there be enough left over to fund your personal needs?

These are some of the questions you are likely to answer when sending an application to any financial institution. Your business plan should show your lenders what you plan to do. It should be able to demonstrate a reasonably high demand for the goods or services your business will be offering. This is one way to show that the money is in safe hands and you will not spend it carelessly.

Credit Worthiness

A review of your financial behaviour, both in the past and in the present, is part of what makes up your application. It is called a credit check or credit worthiness.

It is true that a squeaky-clean financial record will place way in front of the line, but a poor or sketchy record does not disqualify you totally, at least not in all cases. However, checking this helps the financial institutions you apply to determine your level of responsibility. It also helps them lend to the right people and keep applicants who will not be able to pay back from overburdening themselves.

Personal Affordability

You are personally responsible for the money you borrow. This is because this type is usually unsecured, so you don’t need to put up a collateral.  However, you will be held accountable for paying it back in full, together with the accrued interest, within the stipulated time.

Therefore, a financial institution is likely to ask you to provide documents detailing your source of personal income and how much you spend in a month. This will help determine how much you can afford per month and help them decide on your application.

Click here to learn more about funding options available for start-ups.

Crop anonymous female filling questionnaire when applying for job sitting in employer office

When You Need to Get One

The requirements of your business will determine when you apply for a start-up loan. For instance, it is pointless applying for one when you are only looking to buy a photocopier for your office. Therefore, if the money needed is not so much but is beyond your capacity to fund, an unsecured loan is the way to go. 

This type is one where you do not need to put up any form of security or use a guarantor. In other words, it is a loan gotten without a collateral. But if the money needed is a large sum, you will need to get a secured loan.  This type is one where you need to put up security before it is given. Plainly speaking, it is a loan gotten with collateral. This is to make sure it is paid back fully and when due.

Each type has its own advantages and disadvantages. But let us discuss unsecured loans.

Unsecured Loans

The advantages, apart from not having to put down a collateral, is that it is usually disbursed quickly. The requirements needed for getting one are also affordable. However, one of its disadvantages is that the amount given is usually small. That is there is a limitation on how large an amount a financing institution is willing to give. This is due to the lack of collateral.

Another disadvantage is that it costs more to pay it back than it does with a secured one. The interest rate could be as high as 20%. This is typically dependent on the ability to pay back and the credit score of the applicant.

In other words, if there is any uncertainty around you as an applicant, the interest rate is likely to be high. But if your credit score is high, the chances of getting a reduced interest rate are high.

In addition, the amount you borrow will affect the interest rate. If you apply for a large amount of money, the rate will be lower than if you apply for a small amount.

How to Get the Best Unsecured Loan Offers

To get the best offers, it is important to get quotes from different banks and financing institutions. And to do that, you need a loan agent. 

There are many credible agents working with banks and other such institutions. For example, if you are in Norway visit forbrukslå – bedriftslån to see some credible agents in the country.

Important Note

Do not send your application through more than one agent. This is because many of the agents work with several banks. So, if you send in your application to, say, 3 agents and they end up sending it to the same banks, the banks will get several applications from you. 

In the end, you may not get a favourable response because the banks will not know which agent to work with.

What to do? Send your application to one agent, to begin with. Then, find out which banks or financial institutions they do not work with. After this, find another agent that works with these other institutions and send your application to them.

Spending the Money

The bank or institution lending the money does not stipulate what you spend the money on. You can spend it on renting or buying a business premises, equipment, marketing and so on.

However, be aware that your business plan must detail your intentions for the money, in a convincing way. And the plan must also show how the expenses will contribute to the start or growth of the business.

Therefore, ensure you map out every part of the business and what will go into it. This way, you will be able to determine how much each stage or section of the business will cost.

Run through it using a fine comb. Doing this also helps you decide how much to apply for without having to recourse to borrowing again within a very short time.

Repayment Plan

When you get an unsecured loan for your company, whether limited or unlimited liability, the repayment falls on you. This is because you secure it using your name, so the credit-rate is personally to you.

If you are the sole owner of the company, sending the money to the company will not be a big deal. However, if the company is limited, you will find that there are challenges with sending it.

Nevertheless, there are 2 ways to do this if you are not going to get into trouble:

Increase the share capital. Follow the guidelines and regulations for doing this and report the increase to the appropriate authorities.

Lend it to the company. That means the company will borrow it and you become the lender. But draw up an agreement to show this. And make sure the interest rate is the same as that of the initial loan. This makes accounting for funds easy.


Set a realistic goal and budget for your business. Then, spend time looking for and finding the cheapest and best loan options available. Borrow little and pay as much as you can within the shortest period. The less money you borrow, the less you will have to pay back. 

As long as the money covers the most pressing needs, you don’t need to go overboard. Doing so will put a strain on your company and this is particularly bad as it is a new business.

Categories: Finance