If your business requires a loan of more than a few tens of thousands of pounds, it’s almost certain that you’ll be asked to provide security to your bank. This has led to some cynical commentators to remark that high street banks act as little more than pawnbrokers, and for many fast-growing sectors such as technology, media, recruitment and business services, the banks’ approach is particularly unhelpful.
Companies in these high-growth sectors rarely own significant assets such as property, vehicles or machinery to put forward as security against a loan — and that’s where alternative finance’s unsecured lending comes in.
A new obvious choice
Until the credit crunch and the reduction of business lending that followed, big banks had always been the primary source of finance for companies, whether they were just starting out or were well-established and profitable.
Now, the business lending landscape is hugely diversified; big banks tend to help big corporates while for many other firms alternative finance is the best route to funding. From crowdfunding and peer-to-peer through to more traditional products like commercial mortgages and invoice factoring, the broad alternative finance market offers new ways of funding a business, particularly if it’s relatively young or relatively small.
But even though small businesses are having a slightly easier time of it now that lending is easier to come by a few years on from the recession, there is an elephant in the room: what can smaller, newer companies offer as security for finance?
It’s all about assets
Secured business lending refers to anything backed by assets — for example, borrowing £100,000 by using a commercial property worth £200,000 as security. Or, at the other end of the spectrum, borrowing £1,000 for a few weeks backed by the £5,000 value of the company van.
Large or small, this type of lending always requires assets. Whatever the asset or financial value, it all comes down to the lender’s risk, which is decreased by the knowledge that they have a charge over a valuable item that can be sold in the event of default. Generally, as the value of the assets increase so does the lender’s offer — and if you borrow a small fraction of the asset’s value, you might even pay less interest.
Extending this logic a little further, we come to the less tangible area of assets, such as invoices and accounts receivable. To use factoring as an example, even though the business doesn’t legally speaking hold the value yet, an invoice serves as sufficient proof that the money is coming in soon, and therefore, the lender is happy to lend based on that value. That’s why invoice finance providers often want to know who your customers are, or deal with them themselves — it all relates to their likelihood of honouring the invoice.
What can asset-light firms use as security?
All this makes intuitive sense — in the same way that a mortgage is based on the value of a property, which can be resold if repayments stop, business loans are often secured against assets. In fact, it’s an idea central to most forms of business lending. But what do you do if you need a business loan and you don’t have sufficient security?
Imagine a media or recruitment company — perhaps one that’s been trading for a few months, making waves in the industry, and has an exciting new idea — even if their intellectual property includes the next big thing, they’re unlikely to have tangible assets beyond a few desks and computers. There are also lots of situations where a business might have assets but would prefer not to use them as security.
These problems arise more often than you might think, and the result is many promising firms cut off from the lending that would help them go from newly established to fast-growing.
Unsecured business loans
Fortunately, the alternative lending market stepped into the gap left by restrictive bank lending policies, with a diverse range of new unsecured business finance products now available. Some of these unsecured business lenders target fast-growing firms, and some focus on established firms with temporary cashflow challenges such as late payment.
Equally, some of these new unsecured business lenders are traditional in their approach to how they assess the risk of your business, and some are highly innovative. What’s more, while the mainstream banks are extremely unlikely to lend more than about £50,000 for unsecured business loans, in the ever-growing alternative finance market there are lenders willing to offer unsecured business loans of up to £250,000 — a huge amount more than it’s possible to secure from the bank.
All this means promising growing companies can borrow what they need to get their plans off the ground; rather than being forced to fit banks’ criteria for lending that would restrict their ability to grow. And one of the best things about unsecured business loans, as well as the fact that it’s possible to borrow up to £250,000, is that they can be used for a wide variety of business purposes.
In a nutshell, whether it’s marketing costs, servicing a big new contract, or expanding the premises, it can all be achieved with an unsecured loan.
That’s why I refer to unsecured lending as alternative finance’s ‘unsung hero’ — while it might not be the most appealing term, or even one that business owners are aware of, without it there would be swathes of dynamic businesses unable to get a loan big enough to grow as quickly as they’re capable of.
And as more and more new companies in the UK focus on services and technology, this demographic of asset-light firms is hugely important to British innovation at large.
I think we can all agree that successfully funding this section of small and medium sized businesses would be a very good thing for the economy indeed.
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