At ACF Direct, we’re committed to providing you with all the information required in order for you to make informed decisions.
As part of that, here is another in our series of FAQs and answers – this time covering unsecured business loans.
What is an unsecured business loan?
The term might sometimes be used to mean slightly different things but typically it implies lending that takes place without the lender asking for security against it.
To explain, let’s consider two different examples:
- someone lends money for the purchase of, say, warehouse handling machinery and space expansion. In return, they ask for the loan to be secured against property you own. What that means is that in the event you do not keep up repayments of the loan, then the items themselves and possibly your property used as security may be seized and sold after due legal process;
- someone lends a sum to help you survive a short-term cash flow hiatus. They ask for no security against the loan. If you fail to repay it, they may have certain rights to take legal action against you for recovery but they have no automatic legal right to seize assets from you. That would be an unsecured loan.
Isn’t an unsecured loan always best then?
No, not at all – though it might sound attractive.
The reason for that is that lenders will typically regard unsecured lending as posing a greater risk for them in terms of potential difficulty in recovering their funds should something go wrong. That in turn will typically mean that they will require a higher return for unsecured lending.
To put it another way, if all other things are equal, typically unsecured business loans may cost more than those that are secured.
What about borrowing for vehicles?
That is typically a slightly different situation.
There, with something like Hire Purchase (HP), you don’t actually own the vehicle – the lender does. That only changes once you have made your final repayment so the vehicle or other asset is, in fact, the lender’s basic security.
Is it possible to find unsecured loans?
Today, it is not easy to find substantial unsecured business loans though they may be available in certain situations.
- are for smaller sums borrowed over short durations;
- require exemplary current business metrics and/or a very good personal credit score;
- often rely on an existing business trust relationship being in place, such as the borrower having previously repaid loans with the lender concerned.
However, do please contact us for a discussion of your specific needs. Unsecured lending may be an option in some cases or you may decide, once you have the facts, that you would prefer another approach.
If I’m unable to repay an unsecured business loan, would that be the end of it?
As touched on above, a lender may have relatively easy recourse to the courts for other forms of legal procedure in order to try and recover their money. In some cases a court can order the seizure of your assets anyway.
Unsecured lending should not be interpreted as a possible way out of unsustainable debts.
Why did my neighbour get an unsecured loan for building a conservatory in his garden when I can’t get one for expanding my offices?
It’s impossible to say without knowing more about the totality of the two situations.
The most obvious explanation relates to the sums being borrowed (yours may be much higher) and the fact that yours is for commercial purposes and your neighbour’s domestic/residential.
Typically, unsecured lending is more commonly associated with domestic lending as opposed to commercial. The reasons for that are touched on above.
Once again though, please don’t assume you can’t get such funding. Call us without further delay and we will see how we can help.