A strong unsecured lending market is vital for the health of SMEs across the UK. The market has seen its biggest ever change over the last 10 years with ways of borrowing evolving in favour of the SME.
The rise of fintech outfits and peer to peer lending have seen the unsecured business market transform meaning the high street is no longer the go-to for those looking for a business loan.
The different types of business loans
Unsecured business loans – in the traditional sense are still around and tend to be the most popular option.
The traditional unsecured business loan works in much the same way as a personal loan. An agreed sum is loaned for a set term, with fixed monthly repayments made to pay off the loan in full over the pre agreed term of the loan.
On top of traditional loans, there are a number of innovative lending products for small business owners, such as unsecured revolving credit and merchant cash advances. We will cover these products in detail in future articles.
In addition to unsecured lending, there are thriving invoice finance and asset finance markets. Although these products do not require security over property, they are secured by way of the asset or invoice in question.
Understanding the application process
Although each lender has their own application process, there are common themes across the different types of lender.
Traditional bank lending, through your business current account provider, tends to be a more manual and relationship lead approach.
This has the benefit of allowing you to influence the likelihood of acceptance by offering additional detail where needed for context.
The downside to traditional bank lending is clear and well known. Manual underwriting of applications through banks systems tends to be a slow process. In addition, criteria tends to be very strict and banks have a reputation for turning away small businesses in need of a helping hand.
Although the reputation isn’t entirely fair, depending on the company and the circumstances, it can be difficult to secure a loan from your bank.
The new breed of Business loan lender tends to be technology lead and often more flexible in their criteria.
Applications are now heavily automated, with computerised credit checking and risk profiling.
This can offer a major advantage in that applications can be completed quickly, the funds are often paid into your bank within in a few days. Even if your application is unsuccessful, you can be made aware within minutes from applying, meaning you can look for a 2nd option quickly.
The downside to this automation is that there is little opportunity to influence the lender’s decision. Your application could be declined due to a ‘negative’ that has a perfectly reasonable explanation.
The documents needed to apply
Whichever route you decide to go down, there are some common documents that will need to be assessed before a decision can be made on your application.
You can save yourself a lot of time further down the line by making sure you are ready to send your lender (or broker) some key documents.
Business bank statements – lenders will usually want to see 3-6 months business bank statements. This allows them to understand how your cash flow is managed and how well the account is running.
The ideal bank statements would show predictable cash flow, all payments made on time and the account running within its set limit, whether it’s always running in an overdraft or not.
Two years trading accounts – the trading accounts show the lender the raw affordability of the loan.
Before releasing funds, any lender will want to know that you’ll be able to repay the loan as due. Some lenders will have stricter affordability checks than others, but they will all want to check this point.
An ideal set of trading accounts would show a net profit far in excess of the total proposed annual loan repayments.
Personal information for the Directors/major shareholders – although the application is made for the business, the lender will always consider the credit rating and financial position of those who control the business.
Although the business is a separate legal entity, the ability to manage your personal finances is a good marker to how well you can manage your business finances.
An ideal scenario would be a clean credit history and a reasonable personal net worth for the loan requested.
Proof of ID & residence – as with all other financial products, lenders need to ensure they are on top of anti-money laundering rules.
With this in mind, be prepared to provide them with a driving licence or passport and a utility bill dated within the last 3 months.
Important things to consider before taking out a business loan
Before you start considering the options available to you, it’s wise to think things through. This will ensure you’re clear on your aims and what products would suit you.
This ensures your decisions aren’t influenced too heavily by the available products and ensures you stick to a loan that suits you and is the best overall option.
Budget – be clear on your monthly budget from the start. People tend to creep us their budget to fit with what is on offer, which is a mistake and can put a strain on your finances.
How quickly do you need the funds – some products can be completed far quicker than others. Set timescales for when you would ideally like to have the money, and if relevant, a date by which you must have the funds.
This approach will allow you to quickly distinguish the best option further down the line when presented with multiple options.
How likely you are to repay the loan early – some lenders may offer a low-interest rate but may have large arrangement fees or early repayment charges.
Although the low rate may seem appealing, any savings on rate can be quickly wiped out by large fees, especially if the loan is repaid early.