Unsecured Business Loans | A guide to unsecured business finance

Why are businesses searching for unsecured business loans as opposed to secured business loans?

Are businesses hesitant in securing funding against tangible company assets in the event of missed payments or defaults or are they unaware of the potential benefits of using secured business funding?

What are unsecured loans?

Unsecured business loans do not use any tangible assets, either personal or business, as collateral when applying for business finance. When using unsecured finance, lenders look at your personal credit rating, business bank accounts and business financial reports, this is known as an affordability assessment.

How they decide on your suitability for business loans varies from lender to lender based upon their own predefined affordability criteria, but all lenders must ensure that they carry out responsible lending.

What is Business Loan Affordability

Affordability assessments are a process that lenders use to determine whether you will be able to afford your loan repayments, be able to complete the loan term and whether it is a sustainable loan. Sustainability considers the financial impact of the loan repayments on your business’s financial health. If it is perceived that a loan would have a negative impact on the operation of your business, such as cashflow issues, having to sell assets or even having to take out additional business loans to cover your payments, then approving the loan application would be “irresponsible” and break FCA guidelines.

Affordability and sustainability both full under “responsible lending”, which all lenders must adhere to, under FCA (financial conduct association) regulations [find out more].

What are Responsible lending regulations?

  • Loan Type
  • Loan Amount
  • Total Loan Cost
  • Company financial status
  • Applicant(s) personal credit history
  • Any existing loan agreements
  • Applicant(s) vulnerability, regarding their mental capacity to understand the obligations and any risks involved in taking out a business loan

Based on this, under responsible lending guidelines, a lender would not approve your loan if they thought you couldn’t afford the loan repayments, which would then put your assets at risk. Thinking about this, if businesses are hesitant about securing loans on assets in the case of defaulting, lenders wouldn’t issue the loan in the first place if they thought you couldn’t meet the loan agreement.

Yes, you cannot predict the future in terms of financial security however, using predefined criteria and credit checks, it is possible to make educated decisions on the suitability of a business loan for a company based on their history and status.

Which are the best unsecured loan lenders?

You may not always meet the lenders own criteria when applying for a loan. With the structure of this, many businesses whether self-employed, SMEs or large corporations choose to use a commercial finance broker with large number of lenders on their panel to maximise their chances of success. [find out more].

In short, brokers with a wide and diverse lending panel can source more suitable and cost-effective loans for their clients based upon their circumstances, but more importantly know which lenders to approach to reduce the risk of rejected applications.

What are the Pros and Cons of Unsecured Business Loans?

Easier applications (in most cases)

As you are not using security or collateral when making the application there is less paperwork that needs to be completed. If you are applying for a secured loan, valuations of asset(s) must be undertaken (by an independent valuer) along with proof of ownership. This can increase the amount of time and paperwork that needs to be complete.

When applying for an unsecured business loan, this does not need to take place. As previously mentioned, only your business bank account statements, business financial reports and personal credit ratings are required. Because of this, RLA Capital give decisions on unsecured loans within 48 hours of application, with funding being released within 24 hours of all documents being signed by the client after a decision. Secured business loans will take longer due to the increased legal documentation that needs to be completed.

Loan Amounts can be lower

With unsecured lending, there is a higher perceived risk to the lender in the event of non-payment, as there is no collateral in place. Because of this, lenders may approve smaller amounts in relation to secured loans. It is worth noting however, that if your company is in a financially strong position with a good credit history, the reduction in loan value is negligible. There are still many ways for a company with poor credit to obtain business funding [find out more], with secured loans being one of them.

The use of unsecured business loans for self-employed businesses, SMEs or large corporations can be highly beneficial and effective way to increase cashflow and spending power.

For more information on unsecured business loans for UK business, do not hesitate in contacting us to discuss your loan requirements.

Updated: April 1, 2019