Unsecured Business Loans in the UK
What Does Unsecured Business Loan Mean?
An unsecured business loan is a type of business loan where the borrower is not required to put forth any specific kind of collateral if the money cannot be paid back on the agreed upon conditions.
Collateral is a type of security the borrower has to put forward as a guarantee that a loan will be repaid. This typically comes in the form of personal liability or an asset. If the loan cannot be paid back, or ‘defaults,’ then the collateral will be seized by the lender and then sold to compensate for the loss.
An unsecured business loan does not involve collateral, making it a great option for businesses that do not have valuable assets to put forward. However, unsecured business loans’ interest rates are typically higher in order to protect the lender. This type of commercial loan is also typically a short-term loan option.
Secured business loans, on the other hand, are loans that are protected with an asset or a personal guarantee if the money cannot be repaid. These typically take longer to process, as the collateral has to be agreed upon and evaluated in relation to the loan.
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Is an Unsecured Loan Really “Unsecured”?
Unsecured business loans are a fast financing option because there is no processing time related to valuing the asset or personal guarantee put forward as collateral. However, this does not eradicate the element of collateral in the agreement.
Although unsecured business loans do not force the borrower to offer a specific guarantee, it does not mean that it is a risk-free business loan option. A lender can in fact still be held liable if the loan defaults, as every business loan includes some kind of guarantee.
With a secured business loan, the lender can only seize the specific collateralised asset. With an unsecured business loan, however, the lender has more free reign to collect the equivalent value of the outstanding money. The collaterals of this type of commercial loans can include assets related to the company, or if that is not enough, then even personal assets such as your home, your pension, or even your spouse’s pension.
There are ways for lenders to protect themselves with unsecured business loans, in the form of:
Personal Guarantee as a Form of Security
Personal guarantee can range from limited to unlimited personal guarantee. In both circumstances, the lender is personally liable to repay the debt. For this reason, ensure you only borrow as much money as you can pay back.
Also be sure to always read the fine print on any business loan agreement as it will probably contain information about liability in the case of a defaulted loan.
Limited Personal Guarantee
A limited personal guarantee is when the lender and borrower have agreed on specific terms and parameters in the case of a defaulted loan, typically in the form of a set amount of money. Any owner of a company that has a 20% stake in the company or more is typically involved as a guarantor.
The terms of limited personal guarantees vary with each loan and each provider, thus it is important to be aware of the fine print, and to keep in mind that even though it is an unsecured business loan, it does not mean there is no personal guarantee.
Unlimited Personal Guarantee
Unlimited personal guarantee is the most far-reaching version of personal liability, and if your unsecured business loan has this condition in the agreement, you must be sure you only borrow as much as you can repay.
With unlimited personal guarantee, the lender has full freedom to recover the full amount of the debt from the borrower’s personal finances. This can reach as far as reclaiming the legal fees incurred during the process, and can include virtually anything; from a family home, to a car, to pension savings. It can even affect your spouse’s savings.
Therefore, it is critical to read your agreement thoroughly, as there are no unsecured business loans with no personal guarantee.
Blanket Business Lien as a Form of Security
With a blanket business lien, the lender can seize and sell any of the business’ assets that are listed on the balance sheet to collect the money that is owed.
Any of the items on a company’s balance sheet is considered seizable, and the connection between the asset on the balance sheet and the loan is irrelevant.
Some business liens state that the lender may only seize assets purchased with the principal loan, thus it is important to be aware of specific terms related to your loan.
What Happens If You Default on an Unsecured Loan?
When a loan defaults, it means the borrower has not paid back the money in the agreed upon timeframe. In the UK, a default notice is sent out to the borrower, demanding the repayment of the outstanding amount.
This notice outlines the terms of the agreement, as well as the amount missing, and what the next steps will be. It is important to ensure you are only borrowing as much money as you can pay back, as a credit notice affects credit score, which in turn can make it more difficult to borrow money in the future.
If the default notice is still not paid, then the lender can turn to the court, and the court will take action. If a court order is filed against you, also knows as a CJJ, you have up to 30 days to repay the outstanding money, otherwise this will remain on your credit score for up to six years.
Are Unsecured Loans Safe?
Unsecured business loans are considered to be one of the safeset loan options for small businesses, as the borrower does not need to provide collateral. Furthermore, unsecured business loans offer flexible repayment options to adjust the loan to the business' needs. Yet, this type of financing is unrestricted, also called multipurpose, that is, the lender does not require you to spend the loaned money on one specific asset.
Advantages and Disadvantages of Unsecured Business Loans
Unsecured loans for businesses is a popular financing method, as there are many advantages to this type of loan. It is important to do the relevant research and find out how unsecured business loans can be a good option for your company, but it is equally as important to be aware of the disadvantages or risks involved.
|Pros of Unsecured Business Loans||Cons of Unsecured Business Loans|
|Fast financing option||High interest rates to protect lenders|
|Easy to obtain if you have good credit history||Difficult to get if you have poor credit history|
|Not required to put up specific collateral||Difficult to get if you are a small business with no established financial history|
|Lender cannot seize assets without court order||Defaulted loan can result in extensive personal liability|
|In case of bankruptcy, unsecured loans are more likely to get discharged||Can be court-ordered to give up company or private assets if the loan defaults|
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Unsecured business loans are a fast financing solution for businesses with an established and solid financial history. It is relatively easy and quick to get approved for an unsecured business loan in this case, because the processing time of valuing the collateral in relation to the amount of money borrowed is avoided.
As the main advantage of an unsecured business loan is that no specific collateral has to be provided, your business can still take out a loan if does not have valuable assets to offer as security.
In the case of a defaulted loan, the lender cannot seize any assets without a court order. However, if it does get to that point, then the lender has almost free reign to collect the money owed.
Finally, in the case of bankruptcy, unsecured loans are more likely to get discharged than secured ones. While this is an advantage, you should still only take out an amount you can be sure you can repay.
Unsecured business loan interest rates are higher than other loans, which is done to protect lenders from the risk of loaning through this method. The high interest rates effectively mean that you may be paying more for the money over time, which is a reason why it may not be the best solution for a small business with limited financials.
Having a non-existent or limited financial history increases the difficulty of being approved for an unsecured business loan, as the lender cannot assess the probability of full repayment.
While unsecured loans for businesses with no valuable assets are a great option, these kind of loans carry an inherent risk of personal liability. When a court orders the seizing of assets due to a defaulted loan, the borrower may be liable to pay the full amount back. The lender can claim almost anything, even personal assets such as a house, personal savings, or a spouse’s savings.
Where to Get an Unsecured Business Loan In UK
There are a few means of getting an unsecured business loan in the UK, and depending on the size and maturity of your business, you may have more or fewer options.
Before taking out an unsecured business loan, it is important to be completely secure in your business plan and calculate exactly how much money your business needs to borrow, and more important that you can pay it back in full.
A good credit score is typically required, so consider this when opting for an unsecured business loan in the UK.
There are three common ways of obtaining an unsecured business loan:
A traditional lender like the bank can offer unsecured business loans, however this will be the most rigorous and strict process compared to the rest. You will need to provide a financial history and potentially other paperwork. Therefore this option is most suited for established companies, rather than startups.
Banks set their interest rates according to the federal funds, meaning they will have the best rates. If possible, borrowing from a bank would be the best solution, as commonly have the best repayment terms, too.
2. Peer-to-peer Lending
Peer-to-peer (P2P) lending is a great alternative to acquiring an unsecured business loan, as it means you are borrowing from other people rather than official bodies or institutions.
Terms and criteria vary from case to case, which can make it easier to get approved for a loan. This gives newly founded companies a chance to obtain an unsecured business loan as well. Funding Circle offers unsecured business loans up to £500,000, but they require a personal guarantee.
3. Online Lenders
There are many online lenders out there that offer different types of loans, including unsecured business loans. Similarly to P2P lending, online lenders have the liberty to set their own terms and conditions, thus it is important to do research to find the best agreement for your business.
Merchant Money offers unsecured business loans of up to £150,000 to small businesses that can provide statements from the past year. In addition, the business cannot have any existing court orders against them, or bad credit. If you do find yourself in a situation where you have bad credit, you can find various alternate options for business loans for bad credit.
How Do I Get an Unsecured Business Loan?
First and foremost, evaluate your credit score, i.e. your ability to repay the debts. Unsecured business loans don't require pledging a collateral such as real estate. Yet, the lender will try to reduce their risk by requiring business asset or personal guarantees.
When you are aware of your credit score, check the requirements and qualifications of different lenders to see where you are eligible and what your options are. Prepare all the necessary documentation and have a clear business plan ready, outlining the purpose of the loan and how you plan to recoup the amount. Finally, apply for the loan and submit the gathered documentation.
Is It Possible for a Startup to Get an Unsecured Business Loan?
Unsecured business loans are difficult to acquire for startups, as there is no financial history to asses. This makes an unsecured loan very risky for a lender. Most unsecured business loan providers state that a company has to have been in operation for a certain period of time to qualify, exactly for this reason. This can range from 6-24 months depending on the provider.
As a startup there are other more suitable means of getting a business startup loan, such as a credit card loan, government startup loan, bank loan, or from online lenders.
As a small business it is not as difficult to obtain an unsecured business loan, but there are other great funding options for small businesses too, where a solid credit score is not critical.
Find the Most Suitable Loans for Your Business
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All content in this website is for informational purposes only and it does not constitute financial advice and/or recommendations and it should not be relied upon as such.