The structure of the business finance sector in the UK today is very different to that of just a decade ago. When you consider that traditional high street banks have already taken a back step with regards to their risk profile on secured loans, you can imagine the situation with unsecured business finance. Unsecured debt for a business does not fit comfortably with the traditional high street bank business model. So, what are the alternatives for unsecured business finance if there are no options on the high street?
What is an unsecured business loan?
First of all, let us clarify the characteristics of an unsecured business loan. It is simply an unsecure debt arrangement which is based more upon company cash flow and future prospects than any type of security/collateral. There seems to be a greater flexibility and greater understanding of the market amongst the likes of private banks, peer-to-peer lending platforms and the other niche market players. This does not indicate any degree of recklessness with regards to unsecured business loans, more of a broader approach to business/personal financial strength, compared to the high street banks.
Traditionally unsecured business loans tend to attract a higher interest rate compared to their secured counterparts. This is simply a reflection of the risk reward ratio and the requirement for a greater return against any perceived additional risk.
Unsecured business loans based on your business
One of the growing sectors with regards to unsecured business loans is the peer-to-peer market. They will consider all finance applications although all potential clients will still need to provide an array of pre-offer documents. These tend to include:
- Business bank statements going back three months
- Copy of the latest report and accounts filed with companies house
- An up-to-date profit and loss/balance sheet if the accounts are more than 16 months old
Any potential finance provider will take into account the specifics of the business, future prospects and require a business plan. Additional issues which are also taken into consideration include:
- Size of business compared to the loan
- Ability to repay loan
- Cash flow
- Credit history
- Specific reasons for finance
The crowdfunding platforms (and private banks) can very often give a decision on an unsecured business loan application within 24 hours. On occasion, a company director/shareholder may need to provide a personal guarantee in the event of default. Strictly speaking this is still an unsecured loan because the loan is not secured against individual assets. The headline interest rate will reflect the risk/reward ratio associated with the proposed finance.
Unsecured loans: considerations
In the past, companies with a chequered financial history very often found it impossible to raise secured or unsecured finance. Thankfully, the flexible and liquid nature of the modern day unsecured business loan market has changed this. However, it is worth noting that even peer-to-peer business lending companies tend to work on various key considerations:-
- Maximum loans will not normally exceed either 60% of turnover or five times net profit
- The loan must be for use by the business, not for third parties or personal use
- Where personal guarantees are offered there is no formal charge against a particular asset or property
- Loans don’t generally exceed £100,000 for non-homeowners
- If majority ownership of the company has changed within 12 months, it is likely the application will be refused
- Evidence must be provided to show sufficient future income as well as historic bank statements
The opportunity to receive unsecured business finance which is based purely and simply on business income and future prospects can be a game changer. The niche market players also realise speed is often of the essence and you can normally expect a relatively quick decision – predominantly within 24 hours of the application.
Chat to one of our expert advisors
Here at Enness we have an in-depth knowledge of the business finance market unrivalled by our competitors. The fact that we have independent status means we are free to talk to any mainstream and niche business finance providers. Very often circumstances may dictate the use of potentially complex deal structures which could take into account various fundraising instruments. We have completed many seemingly impossibly complex funding applications in the past and are confident we can arrange a debt structure to suit any circumstances.
Call us today for a no obligation chat with one of our business finance expert. We are confident that whatever your particular circumstances we can structure a deal which takes in all of your requirements.