An unsecured business loan is lent against the company's ability to repay, with no specific asset pledged as security. With no charge over property or equipment to fall back on, the lender's decision rests on cash flow, payment conduct and the people behind the business. That is why two companies with similar turnover can get very different answers from the same lender.
What unsecured means in practice
In most cases unsecured means there is no fixed or floating charge over the company's assets. It rarely means the lender has no recourse beyond the company. Much unsecured lending to UK SMEs comes with a personal guarantee from one or more directors, and a good part of the lender's comfort sits in that guarantee. A guarantee is a personal liability and deserves a proper read, ideally with your own solicitor.
The lenders in this market range from high street and challenger banks to specialist online lenders, and their appetite varies a great deal. Some want several years of filed accounts. Others will accept a shorter history if the bank statements show steady income.
How lenders assess an unsecured business loan
Every lender writes its own credit policy, but the questions tend to fall into the same areas.
Trading history and turnover
Time trading is usually the first filter. A company with a year or two of filed accounts gives an analyst something to measure against, while a recent start-up is asking the lender to rely on forecasts. Turnover sets a rough ceiling on the amount, since many lenders size an unsecured loan as a proportion of annual turnover. That proportion differs from one lender to the next.
Profitability and affordability
Affordability is what settles the amount. The lender wants to see that the business generates enough cash, after existing costs and debt payments, to meet the new repayments with room to spare for a weak quarter. Analysts will adjust filed profit for one-off items, director pay taken as dividends and anything else that distorts the picture. A loss last year does not rule a business out, though it needs a clear explanation and usually recent management accounts showing improvement.
Bank statements and open banking
For smaller loans the current account often carries more weight than the accounts. Lenders read statements for regular income, the timing of outgoings, the lowest balance each month, returned payments and reliance on an overdraft. Many now ask applicants to connect the account through open banking, which gives the lender a read-only view of several months of transactions. That includes the ones you might have preferred to explain in person.
Existing debt
An analyst will list every facility the business already has, from term loans and overdrafts to asset finance, credit cards, merchant cash advances and loans from directors. Several loans from different lenders in a short period can read as a business under strain, even when each had a sensible purpose.
Credit files
The lender will search the company's commercial credit file and, where there is a guarantee, the directors' personal files too. Late payments, defaults and County Court Judgments count against an application, as does a habit of paying suppliers slowly. Companies House gets checked as well, for late filings, recent changes of director and registered charges.
Director personal guarantees
A guarantee is assessed as well as requested. The lender will want some sense that the guarantor could stand behind it, so home ownership and other personal borrowing can come into the picture. Where there are several directors, lenders differ on whether all of them must sign or only those with a meaningful shareholding.
How unsecured business loans are usually structured
Most are plain amortising term loans. The business borrows a fixed sum and repays it in monthly instalments of capital and interest, so the balance runs down to nothing by the end of the term. Terms are generally a few years at most. Longer tenors are much harder to obtain without security.
Points worth checking in any offer:
- Early repayment. Some lenders let you settle early with little or no charge. Others apply a fee, or price the loan so that much of the interest is payable whenever you repay. If you might refinance or sell during the term, this can matter more than a small difference in headline price.
- Arrangement fees. Often deducted from the advance, so the cash you receive is less than the loan you sign for.
- Conditions. Smaller unsecured loans tend to carry few financial covenants, but the agreement will still set out events of default and any limits on further borrowing.
- Guarantee wording. Check whether it covers the full loan or a capped amount, and whether it extends to other money owed to the same lender.
Common reasons for a decline
Plenty of declines have little to do with whether the business is any good. The case did not fit that lender's policy, or something in the file raised a question nobody had answered. The usual culprits:
- Trading history or turnover below the lender's minimum, or a request that is large relative to turnover.
- Bank statements showing returned direct debits, constant overdraft use or balances that regularly touch zero.
- Arrears with HMRC, particularly VAT or PAYE, with no Time to Pay arrangement in place.
- Adverse entries on the company or director credit files, including unsatisfied CCJs.
- Heavy existing debt, or a run of recent short-term borrowing.
- Accounts filed late, or management accounts that do not reconcile to the bank.
- A director unwilling to give a personal guarantee.
A word on multiple applications. A full application can leave a hard search on the credit file, and a cluster of them in a few weeks is itself a warning sign to the next lender. Where a lender offers a soft-search eligibility check, use it first.
How to prepare before applying
Most of the preparation is making sure the lender's first look at the business matches what you are going to tell them.
- Bring the filings up to date. Accounts and confirmation statements at Companies House, VAT returns current.
- Prepare recent management accounts. If the last filed accounts are more than a few months old, a current profit and loss, balance sheet and aged debtor list help bridge the gap.
- Read your bank statements as a lender would. Go through the last six months and write a line on anything that needs explaining, such as a large one-off receipt or a transfer to a director.
- Check the credit files. The company's and the directors'. Errors do appear, and an old CCJ that was paid should show as satisfied.
- List all existing debt. Lender, balance, monthly payment and end date. The analyst will build this list anyway.
- Be specific about purpose and amount. A request sized to a real need reads better than a round figure picked because it felt about right.
Take a hypothetical engineering firm turning over around two million pounds a year, profitable and five years old, which wants to borrow to fund a new contract. The accounts look fine. The statements show it dipping into its overdraft at every month end, because its largest customer pays on ninety-day terms. Without context, a lender may read that as a cash flow problem. With a short note on the customer and its record of paying on time, the same statements read quite differently.
Kenward Partners works with UK owners and finance directors on business borrowing, including unsecured loans. Often the most useful part of that work happens before any lender sees the file, reviewing the case the way a credit analyst would and working out which lenders are likely to have appetite for it. If a second pair of eyes would help before you apply, we are happy to take a look.
