Raising Finance

How to get an unsecured business loan

13 min read

14 November 2018

Reporter, Real Business

Find out everything you need to know about unsecured loans, from the typical eligibility criteria to reputable providers in the UK.

An unsecured loan is a type of loan where you don’t need to offer up a personal or business-related asset. This means you don’t have to put up your house or business equipment as collateral.

Whilst this sounds like a more attractive option initially, there are some other factors you need to take into account before you opt for an unsecured loan.

In essence, an unsecured loan is a more risky endeavour for lenders such as banks and alternative providers. This is because they are not provided with an asset that they can take should you not be able to manage their loan repayments.

Because the risk is higher for the lender, they need some more provisions from you. This usually comes down to higher interest rates for you as an SME owner, because you won’t have to put up an asset as part of the loan agreement like you would have to if you opt for a secured loan.

The profile of a typical unsecured loan recipient is different from that of a secured one for a number of reasons. Let’s explore what these are to ensure you make the best choice for yourself and your business when selecting a loan.

Examples of an unsecured loan

Whilst a vast majority of loans are secured (they require the provision of an asset as collateral on the loan) unsecured lending includes things like credit cards as well as personal and business loans. This includes the overdraft protection line of credit as part of your credit card facility, to things like student loans.

This means that secured loans are usually for larger amounts than unsecured loans.

The higher interest rates involved in unsecured lending are part of the contingency processes put in by the lender, as they know that there is a likely risk that you may fail to make a repayment at some point, so the interest rates are a good incentive to encourage you to make the payments.

Arguably, lenders have a clearer picture of your financial situation than you would with a secured loan.

This is because you must provide a clear picture of your finances, including cash-flow to prove that you are capable of making regular repayments as part of the unsecured loan process.

In theory, this makes defaulting on repayments less likely, as there is a clear idea of what payments you can manage from the outset.

The loan period for an unsecured loan is also shorter than if a secured loan, and the amount of interest that is charged entirely depends on the length of the borrowing period.

The differences between a secured and unsecured loan

Secured lending is for the long-term, where larger amounts are borrowed for a longer time period. This longer time period means that repayments are not as high as they are stretched out over a longer period of time.

However, a high-value asset must be put up to the lender as collateral should you default on a payment. Because of the nature of secured loans, they are often used to facilitate more ambitious things, such as the growth of a business, because this is something that requires more upfront capital.

Unsecured loans, however, are often sought to cover a shorter time period, because the loan is shorter, interest rates are often higher.

However you don’t need to offer up an asset as part of the loan deal, but part of the catch is that interest rates are higher because of this.

The advantages of an unsecured loan

  • A high-value asset won’t be seized –There will be no risk to your home, or another high-value asset being seized should you fail to make a repayment.
  • It takes the admin pressure off –   You don’t have to go through the process of documenting their assets as part of the secured business loan process, This means that elements of the loan underwriting process can be made easier.

The disadvantages of an unsecured loan

  • The interest rates are higher – You don’t have to offer up a high-value asset. Lenders have to cover their backs in some way, and this is through implementing higher interests rates as part of the unsecured loan deal.
  • It’s bad for people with a poor credit score – Because obtaining an unsecured loan is dependant on your being able to provide a breakdown of your regular finances to show that you are able to make regular loan repayments, it’s not a great choice for people with a less than perfect credit history.

Eligibility for getting an unsecured business loan in the UK

If you are capable of making regular repayments, and can show this to lenders, and have a relatively clean credit score than there is no reason why you can’t be eligible for an unsecured business loan.

However, if you’re looking to borrow substantial amounts of money for a bigger project, such as financing or growing a business than you’ll probably need to be looking at obtaining a secured loan.

If, however you’re looking for short-term cover, and have the income in place to repay a loan of a regular and higher interest basis, then unsecured loans are more for you.

UK providers of unsecured loans

Here are some examples of providers who offer customers the chance to obtain unsecured loan options:

What to watch out for (the fine print)

Be aware that if you fail to make a repayment on your unsecured loan, and because you don’t have an asset to offer to cover the default, the lender can resort to debt collection, and worst case scenario, you might have to file for bankruptcy if you have nothing else to offer the lender.

If you decide to go for an unsecured loan, you can also be subjected to intense credit checks by the lender, and this will not suit everyone.

As part of the unsecured loan process, especially if it’s for a business, company owners and senior staff, including directors may be forced to sign personal guarantees.

Again this option will not suit every business owner, as having their name, associated personal details, and all the risks entailed ascribed to a particular loan, it could all be seen as too risky for some.

Case studies

Here are some examples of business owners who have opted for unsecured loan options.

N&T Consultants Ltd

N& T Consultants is an FCA authorised organisation that offers funding initiatives for other businesses to help them grow.

The problem:

A client of theirs, a supplier of low-energy windows and doors, had secured its biggest ever contract valued at £1,600,000, however their turnover the year before was just £1,000,000.

So, this company found themselves at a junction where they had the opportunity to upscale and expand their business, but they were facing a potential cash flow problem that could stop this great new deal in its tracks.

The unsecured loan solution:

“Time was of the essence for the client and we provided an instant solution by securing an £250,000 unsecured business loan over an affordable monthly repayment schedule over 5 years.”–N& T Consultants

Expert advice: Unsecured lending can halt a potential crisis

The unsecured loan process meant the client was able to obtain the lending money very quickly, which was crucial due to the time-sensitive nature of solving their cash-flow problem.

The company obtained the loan of £250,000 only 10 days later after they applied.

“Our client is now on course for a turnover for the forthcoming year of nearly £4,000,000 due to further secured continual contracts from the same customer.” – N& T Consultants

Enness

Enness is a global provider of mortgages for businesses. Earlier this year, they provided an unsecured loan for a hotelier client.

“Many commercial businesses are unaware they are able to apply for an unsecured business loan, but with the help of the right broker, this is a viable finance option.” – Enness

The problem:

The client in question was having difficulty securing the finance for a new project, he had purchased a new hotel that he wanted to upgrade and expand.

But this client had other assets (including a string of care-homes) so why wasn’t he opting for a secured loan to facilitate this expansion?

Well, this was because the lender who had supplied the commercial mortgage for the hotel initially wasn’t allowing a second charge to be made on the hotel. Furthermore, he had only been running the new hotel for a number of months, so he wasn’t able to take a loan out against the hotel, and that’s when his attention was drawn to unsecured loans.

The unsecured loan solution:

The client could opt for an unsecured business loan as he was able to show company accounts that evidenced his financially sound track-record, which could show lenders that he was more than able to make the payments required.

“The final loan was for £257,500 at an interest rate of 9.5% over the total period of 2 years. My client was delighted with this outcome.” – Enness

Expert advice: Make the right connections

Because it’s less common for commercial businesses to seek unsecured loans, using a mortgage broker with the right connections can ensure that you’re put into contact with a lender that’s more knowledgeable about this process, and more likely to lend to you as a result.

“It’s essential that your case is presented in the right way. A close relationship with the relevant lender is also important. Brokers are able to add significant value; as they have the contacts and the experience to present your application in such a way as to ensure it will be successful.” – Enness

Especially if you haven’t applied for an unsecured loan before, the broker can use their experience in this field to ensure your application is as successful as possible.