If you’re looking for a business loan of more than around £50k, it’s highly likely you’ll be asked by your bank to provide security. More negative commenters have quipped that these days, the high street banks are little more than pawnbrokers — and for firms in recruitment, technology, media or business services, the banks’ attitude leaves little room for manoeuvre.
High-growth companies in these industries are pretty unlikely to own valuable assets like machinery, vehicles, or commercial property to offer as security for a loan — and this is why unsecured lending is something of a ‘secret weapon’ that alternative finance has over traditional providers like banks.
Before the recession, the big banks had always been the first port of call for companies looking for funding — whether they were just starting out or large and established. Now though, the lending marketplace is very different compared to before the credit crunch.
From new technology that allows online invoice auctions and peer-to-peer lending, to more traditional products offered by innovative lenders, there’s many more ways to fund a business, particularly if it’s fairly new or fairly small.
This is all great news. But even though there’s a lot more choice now for small and medium-sized companies, there is one aspect that’s often overlooked — what can these SMEs offer as security for finance?
The importance of having assets
Secured business lending is exactly that — secured — using any assets valuable enough to mitigate the lender’s risk. In other words, you could use a commercial property worth £500,000 to borrow £200,000 for your business.
Whether it’s a six or seven figure sum, right the way down to a few hundred pounds, secured lending (unsurprisingly) always requires security. The principle is the same as a consumer mortgage — in case of default, the lender has a charge or debenture over the property that can be sold to recoup losses.
That’s why the loan offered usually goes up in line with the value of the item, and by the same token, you can’t borrow £10,000 against an item worth £9,000. Even intangible assets can sometimes be used as security — for example, pension-led funding often involves intellectual property (IP).
Invoice finance offers a slightly different explanation of the concept of security in business lending. A raised invoice represents money owed to the business, but because it hasn’t yet been paid it’s riskier than assets in the literal sense (i.e. a van in the driveway or cash in the bank). That’s why lenders offering invoice finance often want to know more about your accounts receivable — by assessing your customers, they’re indirectly assessing your business’s likelihood of getting the money eventually.
This all makes logical sense — lenders use your business assets as an easy way of assessing your company’s ability to pay back a loan. But what can companies without assets do to access finance?
What can companies do without security?
These days there are many firms that will struggle to come up with assets for a loan, because they simply don’t have them. Recruitment, media, technology — none of these sectors will have much more than some computers, desks, and chairs, especially if they’re early-stage.
Even firms that do have assets available won’t always want to put them on the line to secure a loan, for a variety of practical reasons. For example, perhaps they want flexibility to potentially sell the item, because it’s not clear whether or not they’ll need it in a few months.
Businesses experience these issues more often than you might think, and the consequence is promising companies cut off from the funding that would help them get to the next level of growth.
Unsecured business loans
Thankfully, asset-light firms are no longer at the mercy of restrictive bank lending policies since the alternative finance market stepped in to bridge the gap. There is now a diverse range of unsecured business finance products available; some aimed at fast-growing firms and others designed to help established firms with temporary cashflow challenges, for example an invoice paid late.
Some of these new lenders specialising in unsecured loans are more traditional in their approach to assessing risk, while others are highly innovative. Moreover, while the mainstream banks are very unlikely to agree an unsecured loan over about £50,000, in the growing alternative finance market there are lenders offering unsecured loans as large as £250,000 — a lot more than you can get from the bank.
That means growing businesses with potential can access the lending they need to get plans moving, rather than struggling to fit bank lending criteria that would restrict them. One more benefit of using unsecured loans, aside from the fact you can get a much higher loan amount than through the bank, is that a lump sum is flexible — you can use the money for a variety of business purposes. Overall, whether you want to boost marketing spend, gear up for a new contract, or expand your premises, you could do all three with an unsecured loan.
Alternative finance providers specialising in unsecured loans serve an area of the market that the banks struggle to help — of course, this is the case for many different types of alternative lending. Indeed, the term ‘alternative finance’ itself implies that the first choice has already been explored — but crucially, unsecured loan providers are serving a key segment of UK businesses.
Those firms without assets but looking for growth finance tend to be innovative and fast-growing companies, whether they’re working on the next software breakthrough or providing business services — so helping them grow is a good thing for the UK economy at large. That’s why I refer to unsecured business loans as a ‘secret weapon’ of alternative finance.
By Conrad Ford, Chief Executive of Funding Options