Unsecured Business Loan

Ben Larkins and John Maloney answer some frequently asked questions on unsecured business loans.

What is an unsecured business loan?

It’s a sum of money advanced to a business that has no security over any sort of tangible asset – property, any debenture or company assets. It’s always supported by a personal guarantee from the directors or the shareholders.

That can sometimes lead to a bit of confusion – people say it’s not really unsecured because of that guarantee. But it’s simply a promise by the director that if the business fails to pay, then they’ll stand behind it. It gives the funder comfort to know that the director is confident in their business.

How do unsecured business loans work?

It’s much like a lot of business finance products. You make an application online – these are all pretty standard and ask the same kind of questions: what’s the business name, how much do you turn over, do you make a profit and what are the directors’ and shareholders’ details?

We also ask for the last six months’ worth of business bank statements and a full set of the year end accounts. That information is then put into a proposal format by us, we send it to our internal underwriting team and they will determine what we can offer the client.

What are the eligibility criteria for obtaining an unsecured business loan?

There are a number of different eligibility criteria. We don’t work with new startup businesses, and by that I mean businesses that have been trading for less than 12 months.

We require a business to have been trading for 12 months or more with a turnover exceeding £72,000. But others out there will do new businesses. From there it’s a case of getting the financials, bank statements and accounts and seeing where we are.

What documents are typically required when applying for an unsecured business loan?

We usually only require six months’ business bank statements and a set of year end accounts. But if you’re looking to borrow a substantial amount of money, perhaps £150,000 plus, the funder would then probably look at management accounts, a creditor/debtor report and things like that. It would be a little bit more in-depth to support the application for a sizable amount of unsecured money.

Usually, these days, everything’s just a couple of clicks away. I’m sure 99% of the business population now uses internet banking and accounting software. With those you can download accounts and management reports at the click of a button, so it’s really quite simple.

A lot of banks and funders are now doing ‘open banking’. Essentially, they send the customer a link and it allows them to have a real-time look into their bank account.

They can’t make any transfers or anything like that, but they can see up to the minute ins and outs in the bank account. It gives them comfort that they can see exactly what’s happening on a real time basis.

What is the usual loan amount range for unsecured business loans?

We can go anywhere from £10,000 to £500,000. The average loan size would be between £30,000 and £60,000 – that’s our sweet spot.

How long does it take to receive approval for an unsecured business loan?

It’s really dependent on how much you’re looking to borrow. If you need between £10,000 and £20,000 we could have an auto-approval, where you could have the money within three hours.

If you’re looking for something a little bit more niche, perhaps for a project where you need £100,000 to £200,000, it might take between 7 to 10 days from approval to drawdown. It’s quite a quick process.

I think a lot of businesses expect to have to sit with their bank manager to talk things through and the bank manager goes away to think about it. They don’t hear for three weeks and the bank comes back with a load of questions – before you know it, you’re six weeks down the line and calling your bank manager saying that you really need this money.

But we’re a proactive broker. We look at the needs of the customer – if you need an amount of money in a set period of time, we will try and achieve that to the best of our ability. It’s also about managing the customer’s expectations. If you’re looking for £200,000 within two hours, it’s not going to happen.

What is the repayment term for an unsecured business loan?

It can be anything from six months to five years.

What are the interest rates for unsecured business loans?

That’s a hard question but it does come up a lot. I liken it to walking into a restaurant and asking how much it is for dinner. Of course, it depends what you’re having.

But very generally we go from 6% up to 36% [podcast recorded in September 2022]. It’s based on risk appetite. If the customer has strong financials, has been trading for years and has quite evidently got a great business, they’re going to be lower risk.

Somebody who’s been trading for two years, with a few bounced payments on their bank statements and not so strong financials, will be a high risk. That means their interest rate will be higher.

How does having a good credit score impact the approval process for an unsecured business loan?

As per the previous question, it adds to the risk analysis from the funder. If you’ve personally got a good credit score and the business also has good credit, then it certainly won’t hinder the application – it will improve it.

Are unsecured business loans available for startups or new businesses?

They are. It’s not something we do, but there are companies out there that will work with those businesses. There is more risk attached, as we just touched upon. So there’s probably more due diligence required, maybe a bit more security, maybe a charge on a property or something. It’s not something we do, but loans are available to that market.

Can unsecured business loans be used for any purpose?

As long as it’s for the business, pretty much. You can’t take out an unsecured business loan and then go to Borneo for a month.

What are the risks associated with taking out an unsecured business loan?

As with any debt, the risk is that you can’t afford to repay it. Perhaps you haven’t done your homework in analysing where your cash flow sits for the next two, three or four years. It’s difficult, and that’s the risk.

You could overcommit yourself and be a bit cavalier in how much that you want to borrow. Even though that amount might be available to you, do you really need it? Of course, you’ve also got the issue of the personal guarantee. If the business can’t make the payments, you have to pay it back personally.

But that’s no different to any loan or car lease or mortgage. The risk is that you can’t pay it back.

What happens if a borrower defaults on an unsecured business loan?

If they miss a payment, the lender would make contact with them advising them that a direct debit has been missed. They would work with the client to try and get the money in, whether it’s re-presenting the direct debit within seven days or making a card payment or a faster payment into the funder’s bank.

If a company’s taken on a debt and they can’t repay it, it’s not uncommon for people to decide to bury their heads in the sand and not reply to the funder. They don’t answer the phone. But that makes things much worse. That’s when the collections process comes into play and the funder will explore the legal route.

The worst thing anybody can do is ignore a phone call and pretend it’s not happening. That’s when a funder starts getting nervous. Nine times out 10 it’s just missed a payment, but if the funder can’t get hold of somebody then alarm bells start ringing.

Are there any alternative financing options to unsecured business loans?

It depends what you want the money for. If you’re a business who’s perhaps looking at a new digger or a bottling line, you’ve got the options of asset finance and leasing. There’s also secured facilities as well. You can secure a facility on either a domestic or a commercial property, on a loan to value basis.

The bank would have a look at it and see what loan to value you’ve got on the mortgage, then advance a sum of money on that. That’s a much longer process. There are also more risks attached – if you default, you risk losing the property you own.

What are the advantages and disadvantages of obtaining an unsecured business loan?

The advantage is the fact that it is unsecured. There are no charges against any personal or business assets.

A disadvantage of an unsecured business loan might be that they only go up to five years. So if you’re looking for a large amount of money, such as £500,000 or more, or your cash flow doesn’t allow the monthly payments to be spread over a term of five years, you might want to look at a secured business loan. They can be taken over a longer period of seven to 10 years, as long as you meet the criteria.

How can Century Business Finance help in obtaining an unsecured business loan?

We know the products. We know what our funders like and don’t like. We can package a deal in a presentable manner – and the average business owner wouldn’t necessarily have the knowledge to do that. That’s where our expertise comes in.

A customer might think that they’re really strong and can warrant a five-year term – but we look at it very differently. We know what funders like, so we help by putting a proposal together in the best way possible so that our funder looks at it in a positive light.

It takes the stress off the business owner – if they’re running around trying to obtain business finance themselves, they may take their eye off running their business.

We’ll find the lender, package the deal the right way and let the client make an informed decision based on what we’ve told them.

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