The Rise in Unsecured Lending

The Rise in Unsecured Lending

Raising money by Unsecured Business Loans is something that is more accessible given the reported economic growth in the UK. Though economic growth in the UK has risen at a positive rate, the growth of funding for SME’s however has slowed especially as institutions are putting more money into private housing. Many institutions still shy from offering unsecured business loans.

The difference between secured and unsecured business loans relates to how institutions approach the approval process. Secured loans will involve a valuation process of the security, and recognition of the saleability of the asset. The asset is legally assigned to the lender by means of a charge or a debenture. This will cause there to be additional costs of obtaining the security. An unsecured loan will depend on the assessment of the company, its plan, the management and the financial reports. The borrower does not have to pledge an asset or provide a personal guarantee but the loan itself will have higher interest rates to cover the increased risk.

Lenders will offer unsecured business loans as a last resort. Firstly, the borrower does not have any assets in order to directly secure the loan. The difficulty is in persuading the lender to lend unsecured. If a borrower has security, then the lender will obviously take the security but without the security, the lender is likely to lend unsecured creating a viable alternative for the borrower.

There is no direct point in documenting the exact reason as to why unsecured business loans are becoming increasingly popular. There is a popular opinion that unsecured business loans are an easy way to gain finance. This is arguably incorrect due to the lack of formal agreement (in comparison to secured business loans) and the fact it comes with high interest rates. If anything, it is a hard sell for lenders to lend unsecured rather than secured such is the risk.

The rise could be down to two points. Firstly, lenders are now prepared more than ever before to lend unsecured whereas in the past-lenders would not have considered unsecured lending a viable path for funding. The other is that there are more requests for unsecured business loans than there have been before. The route to secured finance for businesses has been rocky-so unsecured finance is another alternate route.

The rise in unsecured business loans coincides with the growth of the UK economy-said to be the fastest in Europe in 2013. The loans while they do differ from secured finance, the loans are equally as useful as secured business loans for financing businesses.

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