How Unsecured Business Finance Works
In today’s market, unsecured loans are popular with business owners, as they give businesses access to low-interest and flexible finance in a fraction of the time that it takes to secure other forms of funding, such as property finance. So, what do we mean by unsecured business finance?
What is unsecured business finance?
Unsecured business finance is a form of funding which does not require security via the assets of the business or through the director of the business offering personal assets as security.
Most lenders instead require a Personal Guarantee to be signed by a director or directors of the business as the means of security. There are of course, many types of unsecured business finance, including but not limited to:
- Term loans
- Short-term working capital loans
- Revolving credit facilities
- Merchant cash advances
- Ecommerce funding
With many options to choose from, making a formal application can be tricky so here’s some tips on things to consider when applying for unsecured business finance.
Things to consider before you apply.
Firstly, as mentioned above, there are a variety of products on offer, along with a diverse range of lenders. Traditionally, business owners have been used to term loans, with equal monthly repayments made, over usually a five-year period. This type of finance may be useful for some businesses. However, your funding requirements may be better suited to a revolving credit facility or a merchant cash advance.
When it comes to applying, it’s important to apply to the right lenders to ensure you are securing the best option for your business. Working with a trusted broker, who can apply to multiple lenders at the same time will give you many more options, perhaps options you didn’t even know were available.
When making an application, lenders will usually perform either a hard or a soft credit search. Soft searches are ‘light touch in nature’ and will not impact your credit score, but hard searches leave a ‘footprint’. Conducting multiple hard searches can adversely impact your credit file, both personally and for the business. Therefore, make sure the broker you are using knows the type of searches each of the lenders will conduct and make sure the broker keeps you informed.
A third consideration when applying for unsecured business finance is to carefully review the finance offer once you receive it. It’s important to look at not just the interest rate, but also the fees being charged as well as the flexibility of the loan being offered. Does the loan provide you with the flexibility you want for your business? For instance, can you repay the loan early without any charges or penalties? Are you able to make lump sum repayments without a penalty? Some lenders don’t offer this as an option, but many do. Therefore, make sure you find out before you sign the offer.
Most lenders will charge an arrangement fee as part of arranging the finance. The fees charged on unsecured business finance depend on the lender and can range from as little as one percent of the loan, up to ten percent in some cases.
If you decide to use a broker to arrange your unsecured business loan, most brokers will not charge a fee for using their service. This is because they are paid directly by the lender. That said, some brokers may charge a fee for their work, so it is worth discussing with them at the outset, before you start the application process.
How to apply for an unsecured business loan
Firstly, it’s important to understand how much funding you need and where exactly you will be allocating the borrowed funds. If you take the time to break this down and explain this to lenders and brokers, it will give your application more strength.
Simply stating that you require finance for ‘working capital’ is often too vague, so explain both how the funds will be used and how they will benefit your business.
Then check your business and personal credit score. Both of these have the potential to impact your application either positively if you have a good credit score or negatively if your credit score is poor. There may be adverse credit on your file that you weren’t aware of, and which you may be able to rectify prior to placing applications with lenders. Lenders all have different credit appetites. Some will accept adverse credit; others will decline instantly. If you are using a broker to help you with your application, make sure you are open and honest about any issues. It will save you time in the long run and increase your chances of approval, as a good broker will know which lenders are best to approach.
When applying for an unsecured business loan, make sure you have all the necessary documentation ready to send. Lenders will usually want to see a minimum of three months’ business bank statements together with a copy of the latest filed accounts for the business.
However, providing more than the minimum information will give your application a much better chance of being approved, so you should consider providing the following additional information:
- Management Accounts – using accounting software will allow you or your bookkeeper or accountant to provide the latest up to date information for your business. Not only can it make the difference between an offer or decline from a lender, but it is useful in helping you have an up-to-date picture of how your business is performing.
- Breakdown of existing loans within the business – lenders will take into consideration the amount of debt the business already holds. Therefore, it will speed up the process if you have a breakdown of this information including, who the existing loans are with, the monthly repayments and how much debt is still outstanding. Giving this information to a broker is also important because they may spot an opportunity to refinance some or all of the existing debt onto a cheaper rate.
- You may also want to consider providing your last 4 quarters VAT returns and aged creditors and debtors report in support of your application.
When you have all the necessary information collated, the next step is to submit the application. This is usually done through the lender’s website using their online portal. Alternatively, your broker will do this for you.
The benefit of using a broker to make the formal application is that they usually know the lenders well, have a good relationship with them, and this can speed up the application process.
Throughout the process, the lender or broker will keep you informed of progress and come back to you with any additional information they require.
Normally, within 1-2 weeks, depending on the lender, you will receive a decision and hopefully an offer of finance. Your unsecured business loan is now in place!
If you need unsecured business finance and would like to find out your options, please contact Bryony Morse, our Head of Business Finance on 020 3857 3030 or alternatively email her at email@example.com.