Unsecured loans take centre stage again
By Kevin Vendel, senior partnership manager
Many business loans are secured against commercial or personal assets, or require a personal guarantee from a business owner. This has been longstanding practice: should a borrower be delayed with loan payments or even default, the lender can seize the company or personal assets to recoup losses. While taking secured loans is common business practice for small and medium-sized businesses, there is growing interest in fully unsecured loans, where a lender lets a company borrow without asking them for any security.
How does it work?
With a fully unsecured loan, the SME does not need to provide a security and – more importantly – no personal or director’s guarantee. Given that the lender takes on a considerably higher risk, loan assessment criteria is stricter and the client needs to provide detailed financial documentation, including annual balance accounts, profit and loss accounts, VAT returns and business bank account information.
Most unsecured lenders have technology in place which quickly sifts through all the documents and helps underwriters make reliable credit decisions. And because there is no need to check any collateral or personal guarantees, credit decisions can be given within one working day.
A win-win situation?
Due to its nature, many SMEs obtain a fully unsecured loan to comply with short term business needs, such as bridging a cash flow gap, buying new stock or upgrading business technology. An additional benefit is that an SME can apply for a short-term, fully unsecured loan, even if it has a longer-term secured loan in place already. This is possible because there are no asset claims; the loan is therefore complementary and gives the business more flexibility.
What are the costs involved?
Several years ago, when lenders first offered unsecured loans, respective interest rates and fees were much higher than for secured loans. This was mainly due to the fact that lenders struggled to assess risk properly due to limited financial documentation. But times have changed. These days, relevant business information is available on all and more and more data can be provided in digital format. Therefore, SMEs and financial advisers need to rethink if associating unsecured loans with being expensive is still correct.
Times and technology have moved on and thanks to the internet, digitalisation and innovate technology solutions, it is much easier for lenders to determine the level of risk and set the appropriate interest rate. As a result, the interest rates of fully unsecured loans tend to be only slightly higher than those of a secured loan.
It’s a broker’s responsibility to be aware of all financing options available to advise to their clients, with the aim of allowing them to be as successful as possible. A key aspect of this is having the right financing at the right time and price. Unsecured loans should be part of the mix. And this means new business opportunities for brokers and other intermediaries.