A guide to unsecured loans for businesses
In this guide, we detail what an unsecured loan is, how unsecured loans work, how they differ from secured loans, their advantages and disadvantages, information around the types of businesses that can apply for an unsecured loan, and finally, how to apply for one with OakNorth.
Unsecured loans are a great way for businesses to access finance quickly without offering an asset, such as property or collateral, as security for the loan. They also offer greater flexibility for small and growing businesses that want to borrow while keeping their company assets safe.
The term unsecured loan can mean different things to different lenders. There are two main definitions that are used in the industry:
A loan that is not secured by any assets or collateral. This can be riskier for both parties because if the borrower cannot repay the loan, there is no security to recover the debt. Recovery will be via civil actions, such as lawsuits and hiring recover agencies.
Loans that are not secured against tangible assets but are secured against a business’ cash flow and the agreed loan covenants. Any outstanding debt can be recovered by selling the business as a ‘going concern’.
At OakNorth, we only do the latter – unsecured loans that are not backed by any tangible assets (such as property) but have debentures in place.
To mitigate the risk, unsecured loan providers will often provide lower amounts over a shorter time period. Completely unsecured loans (that don’t have any debentures) will have much lower loan amounts than those secured with debentures, or secured loans. And, because they’re riskier for the borrower, unsecured loans can often come with higher interest rates.
Both unsecured loans and secured loans may require covenants and a personal guarantor. A guarantor is someone that signs an agreement with the borrower, stating that if the business is unable to repay its loan, they will personally take on the outstanding debt. This is important for lenders as they need to mitigate their risk of loan defaults and losses.
As noted above, unsecured loans typically do not require you to pledge anything as hard collateral. Instead of evaluating your loan application based on your collateral, the lender will take a close look at the borrower’s credit history, financial statements, and any current monthly payments that the business makes.
If the unsecured loan is approved, then the lender will provide details, including loan amount, covenants, interest rate and annual percentage rate attached to the unsecured loan. It’s important to note that an unsecured loan is not completely without risk for the borrower.
The fundamental difference between unsecured loans and secured is that secured loans for businesses require the borrower to secure the money they lend against assets or collateral such as commercial property, vehicles, or machinery, or, in some cases, a liquid asset such as cash. These loans are sometimes referred to as commercial mortgages or business mortgages, as they work in a similar way.
It’s common for a business to use the asset they are buying with the borrowed money as security. For example, if a business requires capital to buy a property for a new pub, restaurant or hotel, the lender can take that asset as a secondary source for repayment if the business was unable to repay the loan with its cash flow.
As the lender has something to secure their money against, secured loans can sometimes be safer for both parties. In most cases, secured loans will have both a longer repayment profile and tenure. Secured business loans also refer to a wide range of debt finance options, which can be highly specialised or niche. The security element is part of the wider eligibility criteria which allows lenders to assess the risks attached to the loan if a business could not meet the repayment plan.
With unsecured business loans, there’s no collateral requirement. Instead, other considerations, such as business plans and market opportunities, are reviewed when qualifying a business.
When taking out an unsecured loan, a business owner’s personal property usually isn’t at risk in the event of a default. As a result, they don’t have to worry about losing their home or any of their other assets if a negative credit issue arises.
With an unsecured business loan, the lender doesn’t have to evaluate collateral, and can instead focus on other factors, such as the business’s credit report and monthly sales, which could take less time.
Unsecured loans are often used by businesses with fewer physical or tangible assets. For example, technology businesses that offer software as a solution (SaaS) and want to expand or kickstart their growth but don’t have properties or other physical assets to put forward as security.
Secured loans and unsecured loans can be used for similar things. The main difference between the two types is the risk, the cost of the loan, the repayment profile, and the loan amount. Some business activities that unsecured loans can be used for are:
As noted earlier, unsecured loans for businesses can come with risks, so the decision to take one out should not be rushed or taken lightly. A key consideration for business owners should be their financial capabilities – how much can they afford to borrow? How much will they need to repay each month? How will the capital be effectively deployed to support the business in achieving its growth ambitions?
Each lender will have its own limits, but for OakNorth, loans not secured by assets but secured with debentures and share charges start at £250,000 and can go up to tens of millions.
At OakNorth, we offer fast, flexible debt finance – including both secured and unsecured loans – with the success of your business in mind. With unsecured business loans typically ranging from £250,000 up to tens of millions, we provide capital that caters to your growth plans, without you needing to give up any equity.
Applying for an unsecured loan with us is easy: all you need to do is fill out this short online form, and a member of our lending team will get back to you.
We provide fast yes or no answers to help you get funded faster. And rather than offering off-the-shelf solutions, our debt finance specialists can help you build a flexible business loan facility that supports your future ambitions. For loans of a certain size, you’ll even be invited to meet our Credit Committee to discuss your business growth with key decision-makers.