Unsecured business loans are often the only option for small businesses and start-ups, but can you get one from a high street bank and are they just a byword for alternative finance anyway?
Far from being the last resort of small businesses, unsecured business loans are now being treated as similar products to start-up loans, offering similar benefits to SMEs and new business start-ups.
The Growth of AltFi
When you apply for an unsecured loan, it is likely that you will be accessing your finance from a provider in the alternative lending sector. This isn’t unusual, alternative finance, or ‘AltFi’, has been growing so rapidly and gaining such a foothold in the market that the banks have had to sit up and take notice.
Businesses have been forced, by the high street banks, to apply for unsecured business loans from alternative lenders because in comparison to small business loans from the banks, they are, if not more attractive, certainly more attainable from a credit perspective.
The banks themselves prefer not to offer unsecured loans due to their conservative approach to lending and because the credit and lending crunch of 2008-9 still looms conspicuously over their collective shoulder.
The government too, have realised this and attempted to align the banks somewhat to offer more start-up friendly finance, hence both the bank referral system and the government’s own Start-Up Business Loan package. All of which appears to follow the pattern AltFi lenders have already taken in supporting start-ups and offering small businesses competitive loans in the absence of suitable high street funding.
Why Do Businesses Apply For Unsecured Business Loans?
When a business starts, its owner will often be treading new ground, taking a big risk in setting up on their own and starting from square one. Many businesses start with little money and no investment, let alone any sort of consistent cash flow.
It may, or not, qualify for a start-up loan or a business grant, but more often it is with the hard work and enterprise of its founder their own funding. But that funding can only take a business so far, true growth and expansion (and perhaps profitability) takes additional investment, and sometimes, in these situations, the banks aren’t helpful. This is where unsecured business loans come into their own.
There are five popular reasons why a business might apply for an unsecured loan, as opposed to a traditional business loan from the bank:
- Speedier Decision – Being approved for an unsecured business loan can be quicker. Many alternative lenders offer decisions within 24 or 48 hours.
- Security vs Personal Guarantee – Banks will often want to hold security against your property (either personal or business) for your business loan. However alternative finance is usually satisfied with a personal guarantee.
- Flexibility – New businesses, especially those looking for start-up loans find themselves in no position to negotiate with banks. Unsecured business loans from an alternative lender often look beyond the lack of credit history and assess the viability of the business owner and the business itself.
- Bad Credit History – Worse than no credit history can often be bad credit history. But often, bad credit history, is just that – history. Alternative finance is always looking at as many ways possible it can assist in finance. There are always solutions for raising finance and alternative finance can open up the doors to finance you weren’t aware of.
- Loan Costs – The banks are often limited to lending secured amounts, whereas there aren’t usually the same limitations from the alternative lending industry. Most loans are offered as short term loans, meaning they are can be a much cheaper form of borrowing.
When businesses seek unsecured business loans instead of secured loans from the bank, the biggest reason is the defining difference marking the two products apart: security and credit scoring.
Small Business Loans
Business loans are available from every finance provider – banks and alternative lenders included – but they make certain stipulations that often makes them either unsuitable for a business or those businesses applying for them won’t qualify.
Business loans offered by banks and traditional lenders will almost certainly ask for borrowers to secure the loan amount against assets, usually property. If the business doesn’t have any assets to do this, it might not get the finance it is asking for.
Problems also occur when credit issues arise; either poor credit history or no credit history at all can prove to be an insurmountable obstacle for many businesses approaching their bank.
Unsecured Business Loans
Anyone can apply for an unsecured business loan, even those with credit problems. Most lenders offering unsecured business loans will be looking at criteria that isn’t quite as black and white as traditional bank business loans.
Finance providers, when assessing suitability for unsecured business loans, look at a range of business factors and attributes including past, present and future forecasting and business reputation too. These can often be described as ‘contemporary factors’ when held against the dogmatic factors dictating the success of you traditional small business loans application.
The cost of these loans can vary enormously depending on the creditworthiness of the borrower. It follows that the better your credit the lower your interest rates will be and as your credit standing decreases, interest rates correspondingly rise. But that doesn’t always tally, because a huge part of qualifying for an unsecured business loan lies in the perception of your business being able to repay the loan amount back and the level of personal guarantee you can provide.
All things considered, you are more likely to qualify for an unsecured business loan than you are for a secured business loan.
Do The Banks Offer Unsecured Business Loans?
The reason there is such a disparity between the loan products offered by the high street banks and their AltFi counterparts is the fundamental risk-averse nature of the banks.
There are news headlines every year that comment on the position of the banks, which has placed them in a kind of anti-risk limbo. Headlines like this are common:
“It’s official: Wary banks to blame for lending fall“ (Telegraph 2012)
The economic turmoil created by the credit crunch in 2008 is largely to blame for the stricter lending criteria small businesses face today. It’s understandable. The banks have had their fingers burnt by over-extending their lending criteria in the past, so are doubly conscious that they don’t make the same mistake again.
It is a lending philosophy however that hinders more small businesses than the banks actually help.
On the opposite side of the lending criteria coin alternative lenders look at more progressive credit criteria when deciding on loan applications.
What it means is that they are filling the void left by the banking industry, which is still failing to keep up.
A quick look at Money.co.uk’s latest Top 10 Unsecured Business Loans demonstrates how alternative lenders are dominating this loan product.
Are Unsecured Business Loans Becoming a Byword For Start-Up Business Loans?
A start-up business loan is a government-backed loan available to anyone looking to either start or grow their business in the UK. The loan is unsecured, so no assets or property are needed to be used as security, and borrowers typically apply for sums of anywhere between £500-£25,000.
The interest rates of a government start-up loan are currently 6% and repayment periods can be 1-5 years. Many start-up business loans also come with free business support from a mentor who can also advise on business finance like cash flow forecasting, budgeting and preparing business plans and strategy performance.
Unsecured business loans can also be a beneficial funding tool for start-ups to establish their businesses. Because unsecured loans don’t ask for any assets to secure funding against, they are seen as efficient leverages of cash flow needed at the beginning of a business venture.
They also share many of the same characteristics as start-up business loans and can be used for anything that a start-up loan might be utilised for.
Start-Up Business Loans From Funding Guru
Start-up finance from Funding Guru is a similar product to that offered by the government. We also include mentoring from experienced entrepreneurs offering advice on what they have learnt while developing and expanding their own enterprises.
We can help you structure your business plan to make it ready for future investment too as well as assist with external grant schemes and applications you may be considering.
We do this because we believe that applying for your first finance package is just the first step on your business’s financial journey. Every business, no matter how well established, uses some form of finance to further their business interests, expand, purchase property or consolidate at every stage in their lifetime.
So many UK start-ups fail in their first few years, principally because they have cash flow difficulties that are addressed too late, just having the right funding partner for your business can help identify and alleviate potential obstacles in your business’ path.
At Funding Guru, we can often find a business finance solution to suit you that others can’t. We place more emphasis on your business’ future than on its past. Talk to us and we can help establish strong foundations for growth with our start-up business loans, part of our start-up financial package.
