Businesses frequently find themselves in need of a cash injection, whether to buy new stock, refurbish premises, for cash flow or to invest in ambitious growth plans. But, today, there is more to business finance than the old-fashioned bank loan. Short-term, unsecured lending from alternative finance providers is gaining in popularity as small and medium-sized businesses (SMEs) realise just how fast, simple, and flexible it is.
Boost Capital has helped more 20,000 businesses in the UK, US, and Canada since 2002 with this type of finance, totalling more than £1.2 billion in business loans. With the benefit of all that experience, we explain how this style of short-term business funding works, why SMEs like it, and what lenders like us look for when embarking on a relationship with a new business customer.
Short-term loans are an emergency option for businesses = WRONG
Business owners choose short-term lending because they need funds quickly, but plenty of customers actively like that the fact the funds are repaid just as fast, too. Once they have paid off their initial borrowing, many choose to take out a further round of funding to finance their business growth. This fast and efficient style of lending means that companies can get additional finance, when required, much quicker, speeding up their ability to achieve their business growth plans.
Unsecured, short-term lending is always more expensive = WRONG
Short-term loans, by their nature, are paid back over a condensed period of time. It is important to compare the total cost of borrowing of a typical five-year business loan, for example, and the pricing of a business loan that is repaid in a matter of months. Sensible business owners recognise that very often the cost to them is about the same. But a short-term arrangement has the advantage that they repay the finance, much faster.
Short-term, unsecured loans are quick and easy to arrange = CORRECT
The application process for a short-term business loan is incredibly fast, involving far less paperwork than a traditional business loan from a bank. Because this style of borrowing is not secured against property or assets, the information businesses need to provide is hugely simplified, which speeds up the application process. Funds are also quick to arrive in a customer’s bank account – often only two days after an application has been approved.
How short-term, unsecured funding works
Short-term, unsecured lending, offered by Boost Capital is designed to strip away a lot of the complication of conventional business funding. Unlike traditional business loans, which often require a company to put up property or other valuable items as security, this type of arrangement does not require the borrower to have assets. Instead, these loans are:
- Decided upon a company’s recent trading history and overall health, rather than its credit score
- Delivered swiftly, with decisions often made in as little as 24 hours, and funds – between £3,000 and £500,000 in Boost Capital’s case – released within a few days
- Repaid over months, not years
Because the borrowing is not secured against property or assets, more companies can benefit, even those without tangible items of value. This streamlined approach also reduces paperwork, which is why decisions are made so quickly, and funds are so fast to arrive into the owners’ business bank accounts.
Why do we operate like this? Because Boost Capital recognises that when SMEs want money, they want it immediately. Having worked with thousands of small businesses, we understand their needs and seek to champion them however we can. This is why our loans are developed in-line with SMEs immediate needs in mind. Minimal form-filling, no charge on assets, speedy decision-making, and funds soon afterwards. It’s a formula that works, and allows business owners to get on with what they do best – running and growing their business.
How do short-term loans differ from traditional bank funding?
Many SMEs still turn to their bank first when seeking finance, but, in truth, this can be very limiting for a growing company. Conventional business loans usually have a raft of conditions attached that many firms can struggle to meet. The process of applying for regular funding takes a huge amount of time and effort. And, too often, firms face disappointment when they fall short of traditional lenders’ strict criteria. The new style of short-term, unsecured business loans could not be more different.
- Fast to access: Short-term lending that is not dependent on a business owner’s assets, is faster and easier to arrange than a typical bank loan. That is probably the number one attraction for SMEs in need of quick capital to meet pressing business demands. Speed is of the essence, both in terms of the time it takes to process applications, make decisions, and transfer funds. Cash can arrive in applicants’ business bank accounts as soon as two days after application, instead of the weeks or months a conventional business loan can take to arrange.
- Quick to repay: Unlike those of traditional providers, short-term business loans are also designed to be repaid over a quicker period – a matter of months rather than years. That means they can embark on their next stage of business growth that much more quickly.
- Simple to arrange: The big banking groups often demand detailed financial information, copies of tax returns, and spotless credit scores before they will lend to SME customers. Short-term business lenders like Boost Capital assess a business’s recent trading history to see how it is faring now, rather than relying on unreliable forecasts, business plans, or judging it solely on its rating from credit reference agencies.
- Cash talks: What really indicates the health of a business is how much money is coming into it and how much is flowing out, so analysis of a company’s cash flow model forms a major part of Boost Capital’s evaluation process. It also informs how we determine that business’s levels of repayment, so repaying the finance never becomes uncomfortable or hard to manage.
- Fair for all: Short-term, unsecured loans are quick and efficient, but they are also fair. The fact that unsecured business loans are not held against a business’s property means that leaseholders are not penalised when it comes to gaining access to funding. Renting business premises should not put an entrepreneur at a disadvantage when it comes to seeking capital. Nor should operating in a seasonal sector. Boost Capital for example does not require the business owner to be a homeowner for any loan size.
- No risky business: Retailers and wholesalers, pub landlords, restaurateurs, those running nail and beauty salons, manufacturers, even dentists are just some of the types of business mainstream lenders find harder to fund just because of how they operate. These businesses can find traditional finance hard to come by as a result. Boost Capital’s style of business finance is open to a wide range of businesses and sectors, including those which might otherwise struggle to find capital through conventional routes.
- Innovative products: Shorter-term lenders can have different finance products that can suit a business better. For example, a merchant cash advance (MCA) is an innovative product where the business only repays when they earn (via their credit card machine). This works very well for business that have fluctuating turnover, busy and slower periods. Boost Capital provide merchant cash advances, find out more here.
How can unsecured funding be used by businesses?
A major advantage of the short-term model of lending is that businesses are free of their repayment obligations in just months. Boost Capital has financed more than 20,000 businesses on both sides of the Atlantic, and established customers tell us repaying the finance quickly means they can embark on the next phase of business growth. And growth is what many SMEs have in mind when they take a business loan from us.
We have seen restaurateurs borrow to extend premises and increase covers. Bar and pub owners ask for cash to revamp décor, update their menus, and improve marketing. Retailers often want capital to buy stock in the run-up to busy trading times, or to increase their product range. Manufacturers may seek help to buy expensive plant and machinery, while those working in construction might get in touch after winning a new contract to get extra resources and to hire new staff. Businesses across the board sometimes also need help managing cash flow, whether to bridge the financial gap when invoices are waiting to be paid, or to keep the company account healthy during seasonal downturns.
- The choice is yours: Banks will often pass or fail a loan application based on how the money will be used. But we take the view that the owner of a company knows best what business expense is justified and important to the running of their operation. Boost Capital will not specify how any funds borrowed should be spent. Whether you use the cash to execute big expansion plans or smooth out bumps in cash-flow it’s up to you.
- Building growth: Our fundamental aim remains to help SMEs gain access to capital, whatever their immediate need. And when opportunity does knock, we want to get more credit to them more quickly so those chances do not pass them by, or growth slows unnecessarily. Unlike firms operating under the burden of long-term finance, companies using quick-in-quick-out, short-term lending are able to be more entrepreneurial and fleet of foot.
What are short-term lenders looking for in a business customer?
So, what does a Boost Capital customer look like? We have said they represent almost every industry, and are seeking funding for a wide array of business needs. Short-term, unsecured lenders in general are often more accepting of individual companies’ quirks than mainstream lenders. Unlike the banks, we are unlikely to shun a business for working in a seasonal sector, or having existing debt with other lenders. However, there are some things we look for in most cases.
While unsecured lenders do not insist upon assets or property to guarantee a loan, we do expect to see a business has a track record. At least two years trading is a minimum requirement, and a business should be able to provide some evidence of their recent performance, such as several months of bank statements, for example. We like to see a company has a positive daily bank balance, and, overall, to get a sense of what revenue the business is generating. Talking to potential customers about their monthly gross sales and what business is in the pipeline helps in this regard. Fundamentally, we are looking to support enterprises that can demonstrate they are viable, and better yet those in a strong position to grow.
How is this type of borrowing priced?
It is not unusual for businesses to be a little confused initially by the way short-term, unsecured loans are structured. After all, convention dictates that most borrowing is priced using an annual percentage rate (APR) calculated over the fixed term of a loan. Boost Capital’s borrowing has no APR, since repayments are based on a flat rate, which is risk-adjusted. Our loans also have the benefit that borrowers can save on costs if they repay their finance early. No penalties for settling up ahead of the agreed time, unlike with the banks.
The overall cost of short-term, unsecured lending can look higher than a conventional loan at first glance, but that price reflects the higher risk the lender carries. What we emphasise to new customers is that our loans are effectively compressed into a 12 or 18-month period – or shorter if the business wishes to clear the finance quicker. This is very different to a traditional bank loan, where repayments are often spread out over five years. The rate at which businesses pay back their borrowing to a short-term lender reflects that condensed time frame. Companies should look at the total amount they repay over the loan term to put this in proper perspective. Depending on how long a business decides to take to repay the money borrowed, the total cost is often the same as that of a conventional five-year loan.
The fact that 86 per cent of Boost Capital’s customers come back for a second or third tranche of funding indicates that those SMEs that use our services see the merit in this approach, and believe it works for them.
How is a Boost Capital loan repaid?
Not only do short-term loans like those offered by Boost Capital seem quite different in how they are arranged and delivered, they are also distinct in how they are repaid.
- Instead of paying off debt in monthly tranches, repayments for our style of short-term business loans come out of a company’s bank account every working day via Direct Debit
- Loan terms vary from anything between four and 18 months, instead of running for years like a bank loan
- The manageable daily repayments are customised to reflect what is happening with the company’s cash flow. Business owners know what to expect from the fixed payments, and they can be confident there is always capital to maintain their daily operations and financial commitments
- If the nature of a business’s cash flow mean that weekly repayments are a more convenient way of paying, this can also be arranged. The whole loan and how it is repaid is designed around a company’s ongoing financial health so that making repayments is always affordable and comfortable.
- Repaying the finance so quickly has the effect that many business owners then decide to take out a further short-term loan to reinvest, so the enterprise’s pace of growth can be accelerated. Almost nine out of ten Boost Capital customers borrow again.
How to make a business more fundable
- How much is enough? A lender will want to see that you have been realistic in calculations of how much you need to achieve your given goal. Boost Capital is prepared to lend up 95 per cent of a business’s monthly turnover, so consider what you intend to use the funds for to determine whether you have got your sums right.
- Can you meet repayments? We will never lend if we believe a business will struggle with the affordability of repayments, so be realistic about how much you can afford to borrow, and your ability to meet the obligations to repay the finance.
- Explore options. Don’t just go straight to the bank, but look at what is on offer from alternative finance providers as well. Consider why you need the money, then what might be the best source of borrowing in the circumstances.
- Is your business profitable? A short-term, unsecured lender may have less rigorous criteria than a conventional bank, but they still want to see that a business is viable, and that it can reliably pay back the finance borrowed. Boost Capital expects to see that a company has positive cash flow, and that its daily bank balance is sufficiently healthy to sustain repayments.
- Do research. Always look at the lending criteria of a provider to whom you are applying. It is remarkable how many business owners fail to do this basic background work. Some funders will want more information, some less, but know who and what you are dealing with, and what is involved.
- Be organised. Once you have established what information a potential lender will need, get all the necessary details to hand. Can you demonstrate what revenue the business is currently generating? Have you any evidence of new business that is pending? Time wasted in the application will further delay funding, so have documents, such as the last few months’ bank statements, at the ready.
- Improve your credit score. A poor credit score is not the end of the world, but it can help to improve it. Short-term, unsecured lenders will often forgive a less than pristine credit score, but paying your bills on time, avoiding County Court Judgements, plus keeping an eye on your personal credit record could all help improve your business’s rating.
- Be honest. There is little point in trying to present your business to a potential lender as something that it is not, so be transparent with any provider you approach. Failure to do so is more likely to lead to further delays – or rejection.
We hope this guide has helped you understand more about short-term unsecured lending and given you food for thought. For more information on Boost Capital business loans, apply online or call us on 0800 138 9080.