Regulated vs unregulated business finance: what it means for your company

Lending is regulated in the UK under the Financial Services and Markets Act 2000 (FSMA) and the Regulated Activities Order (RAO) made under it. Entering into a regulated credit agreement as lender is a regulated activity, and so are related activities such as credit broking. The Consumer Credit Act 1974 still sets many of the rules on the agreements themselves, such as their form and content, early settlement and the unfair relationship provisions.

The key definition is who the borrower is. Under article 60B of the RAO, a "credit agreement" is one where the borrower is an individual or a "relevant recipient of credit". Article 60L defines a relevant recipient of credit as:

• a partnership consisting of two or three persons, not all of whom are bodies corporate; or
• an unincorporated body of persons that does not consist entirely of bodies corporate and is not a partnership, such as many clubs and associations.

A sole trader borrows as an individual. A limited company and an LLP are bodies corporate, and a partnership of four or more persons falls outside the definition, so credit to any of them is not a "credit agreement" for these purposes and cannot be a regulated credit agreement. Hire and leasing agreements follow the same approach: consumer hire rules apply only where the hirer is an individual or relevant recipient of credit.

Even where the borrower is an individual or a small partnership, some agreements are exempt. The one most relevant to business owners, in article 60C of the RAO, applies where the credit is more than £25,000 and the agreement is entered into wholly or predominantly for the purposes of a business the borrower carries on or intends to carry on. The borrower normally signs a declaration to that effect. So a business loan of £25,000 or less to a sole trader or a two- or three-partner firm will usually be regulated, while a larger one may be exempt. Other exemptions exist, such as for some high net worth borrowers.

Separately, a loan to an individual or trustee secured by a first or second legal charge on land in the UK, at least 40% of which is used, or intended to be used, as a dwelling by the borrower or a related person, is generally a regulated mortgage contract with its own FCA rules. That can apply even when the money is for business purposes.

Because the regulated regime is built around individuals and small unincorporated groups, credit to a limited company, an LLP or a partnership of four or more partners sits outside it. The policy reasoning is that incorporated businesses and larger partnerships are expected to be able to assess commercial terms and take their own advice.

Watch for agreements where an individual is also a borrower, for example a director signing as a joint borrower alongside the company. That can change the analysis, so check who the parties are before you sign.

Personal guarantees need separate thought. The Consumer Credit Act's rules on security, which include guarantees, apply to security given for regulated agreements, so a director's guarantee of a company's unregulated loan is generally outside them. The guarantee is still a legally binding contract and can put personal assets at risk. Take legal advice on any guarantee you are asked to sign.

• Consumer Credit Act protections, such as prescribed forms of agreement, withdrawal and early settlement rights and the unfair relationship provisions, do not apply to the company's agreement.
• The FCA's consumer credit conduct rules, including its creditworthiness and forbearance rules, do not govern the lending.
• Complaint rights depend on the lender. If the lender is FCA-authorised, as banks are, a business that meets the Financial Ombudsman Service's micro-enterprise or small business size tests may still be able to complain to the Ombudsman about the lending, and some personal guarantors may be eligible too. Lenders and brokers that are not FCA-authorised are generally outside the Ombudsman's compulsory jurisdiction. Check your eligibility with the Ombudsman directly.
• General law still applies, including contract law and the law on misrepresentation, and some lenders follow voluntary industry codes.

1. Read the whole agreement, not just the summary. Check fees, default charges, early repayment terms and what counts as an event of default.
2. Compare the total amount repayable across options, not just the monthly payment.
3. Understand every personal guarantee: whether it is capped, whether it is joint and several and how you are released.
4. Check what security is being taken, such as a debenture or fixed charge, and how it ranks against existing lenders.
5. Ask how the broker is paid, including any commission from the lender, and whether you will pay a fee.
6. Take independent legal and accounting advice, especially for larger facilities or where guarantees are involved.
7. Ask any lender or broker directly whether the agreement is regulated and what that means for you.

Firms that carry on regulated activities, such as entering into regulated credit agreements as lender or credit broking for individuals and small partnerships, need FCA authorisation. You can check a firm's status on the Financial Services Register on the FCA website. Arranging finance only for limited companies, LLPs and partnerships of four or more partners is not a regulated credit activity, so a firm that does only that does not need FCA authorisation for it, and should say clearly that it is not authorised.

Welcome Finance, a trading name of Welcome Business Solutions Ltd, is not authorised or regulated by the FCA. We only arrange unregulated commercial finance for UK limited companies, LLPs and partnerships of four or more partners. The agreements we arrange are not covered by the Consumer Credit Act, and complaints about our service cannot be referred to the Financial Ombudsman Service, so please raise any concern with us directly. We do not arrange mortgages, property finance or any lending secured on a home. If you need those, speak to an FCA-authorised firm.

If your business is eligible, you can check your options in 60 seconds. The check will not affect your credit score, and we will explain who the lender is and what the agreement means before you decide anything.