Business loans - what to look for

The world of business loans is vast - over £100bn of loans made to SME's in the UK in 2020 alone (according to the British Business Bank). Often business loans are grouped into 'secured' business loans and 'unsecured' business loans. However, there is no legal and formal definition that define business loans properly. And in the UK, it is often the security of a property that is taken that sets these two categories apart - but not always or by everyone.

Because of this, a 'secured' or 'unsecured' business loan to one person may mean something very different to someone else. Be sure to understand what is being discussed.

This article will focus on unsecured business loans. And in this article, these are loans that do not require the lender to charge a property as collateral or security for their loan. As most traditional lending is 'backward looking' and requires 'downside protection', lenders usually require collateral or security for the loan. This protection may be physical in the form of a hard asset like a property or plant & machinery.

Unsecured business loans may be secured in another way, such as by a charge registered against a specific business asset or more generally over the trading business and its cash flows (the Cash Flow approach). In this case, security may be demonstrated by historical trading profits as a form of protection and potential future loan repayment.

Another form of security is a Personal Guarantee (a "PG"). A PG is a legal document that ties an individual person to the loan and usually makes that individual personally liable. A PG may allow a business to secure other forms of funding but it is important to be understand what the PG entails legally. PG's are not all created equal and you will need to look into the terms in detail - we outline some key points below.

Unsecured loans secured by a Personal guarantee (PG)

• This 'security' is personal and may or may not include your home

• All PG's are not created equal

• Make sure you understand what the PG entails - it may be supported (eg by your home) or unsupported - and there are varying situations for when you can be pursued

• Any business loan with a PG has some characteristics of a personal loan

• In the event of a default, the lender may be able to pursue you personally for recompense

The cashflow approach

• 'Secured' over the businesses trading profits (usually historic)

• A lender will want to be comfortable that the business will continue to be profitable in the future, to repay their loan

• The lender will want to see low customer concentration, high predictability (sticky recurring revenue is favoured) and low client churn (high retention)

• The lender will want to ensure that the management team are competent

If you want to understand more about your options, please get in touch.