Unsecured Business Loan for Start Ups

What are the eligibility criteria for obtaining an unsecured business loan as a startup in the UK?

This can be challenging because lenders typically prefer to lend to established businesses with a proven track record. Having said that, startups should consider various things when seeking loans:

Credit score. Lenders will assess the personal credit score of the business owners or directors. A good credit score demonstrates financial responsibility, and that increases the likelihood of your loan approval.

Business plan. You need to outline your business idea with market analysis, financial projections and a growth strategy. That can improve your chances of securing a loan. Lenders want to see that you’ve got a clear vision for your business and a plan to achieve success.

Purpose of the loan. If you can outline how you intend to use the loan proceeds and how it will benefit your business, that will really help lenders understand your plans.

Legal structure. Being set up as a sole trader, a partnership or limited company can impact your eligibility for certain types of loans.

Industry sector. Some sectors are perceived riskier than others. Startups in high-growth sectors or those with strong potential for profitability might find it easier to obtain finance.

Trading history. While many startups may not have a trading history, if you’ve been operating for some time, even on a small scale, lenders may consider this as a positive.

Revenue and cash flow. Lenders may evaluate your business revenue to date and your cash flow projections to assess the ability to repay the loan. Demonstrating steady revenue growth and positive cash flow can strengthen your loan application.

Personal Guarantees. In some cases, lenders may require personal guarantees from business owners, especially for unsecured loans. If the business is unable to repay the loan, the personal assets of the guarantor may be used to recover the debt.

It’s really important to note that the criteria will vary lender to lender, depending on the specific loan product that you take.

How do unsecured business loans for startups differ from traditional secured loans?

The significant difference between the two is the requirement for collateral. Secured loans require an asset such as a property, equipment or inventory that the borrower pledges to the lender as security for the loan.

Secured loans are considered less risky for lenders, because they have the collateral to fall back on if the borrower defaults on the loan.

Unsecured loans pose a higher risk, since there’s no collateral to recover in case of a default. So lenders tend to impose stricter criteria, higher interest rates and lower loan amounts compared to secured loans.

Unsecured loans often require a stronger credit score and your financial profile has to be better to qualify. An unsecured loan will involve a more rigorous application process including detailed financial documentation and a thorough assessment of the borrower’s creditworthiness and business plan.

A positive, though, is flexibility. How you use those unsecured funds is entirely up to you.

What types of businesses are most suitable for unsecured business loans?

Overall, these loans suit businesses with limited tangible assets or those in the early stages of growth. They can be helpful if you operate in an industry where intellectual property or expertise is more valuable than physical assets.

Examples might be service-based businesses like consulting firms, marketing agencies, IT service providers or online ecommerce businesses, which may not have tangible assets to use as collateral.

Professional practices such as law firms, accounting firms and medical practices also rely on expertise rather than assets. Small businesses operated by a single owner such as freelancers, independent contractors or sole proprietors may find unsecured loans helpful for managing cash flow, purchasing equipment or investing in professional self-development.

Lastly franchise businesses can find unsecured loans beneficial to cover franchise fees, equipment purchase, marketing expenses and working capital. Since franchise businesses often have the support of an established brand and a business model behind them, lenders may be more willing to offer unsecured financing.

What are the typical interest rates and repayment terms associated with unsecured business loans for startups?

Unsecured business loans generally have higher interest rates than secured loans because they pose a higher risk to lenders. Startups in particular may face higher interest rates due to their limited operating history and creditworthiness.

Typical rates range from around 7% up to 30% or more. It all depends on the lender and the borrower’s financial profile. Startups and new businesses tend also have shorter repayment terms, from six months up to five years.

Some lenders do offer flexible repayment schedules, where borrowers may be able to make weekly bi-weekly or monthly payments. [podcast recorded in March 2024]

What factors do lenders consider when assessing the creditworthiness of startups applying for an unsecured business loan?

Any startup should be prepared to provide comprehensive financial information to support their loan application.

Your personal and business credit history is important. If you’ve been trading for a while you’ll need all your business bank statements, and cash flow projection is key. Lenders want to assess your ability to generate enough revenue to cover your operating expenses and service your debt payments.

The other thing lenders evaluate is market conditions. They assess the risk associated with lending to the business. Factors such as industry trends, the competition and market demand will give them a gauge for your prospects and your ability to repay the loan.

As an example, if you’re setting up a business selling fidget spinners, I think that trend has passed – so you may have some difficulties.

Are there any government backed initiatives or schemes available for startup businesses seeking unsecured loans?

Yes, there are a few. There’s the startup loan scheme. This is a government backed programme that provides loans, mentoring and support to entrepreneurs to start or grow their business in the UK. You can obtain loans up to £25,000 at a fixed interest rate with repayment terms of up to five years.

There are also Local Enterprise Partnerships – abbreviated to LEPs. These are partnerships between local authorities and businesses to support economic growth and job creation in England.

LEPs offer funding programmes and initiatives for startups and small businesses in their areas, including loan schemes and grants. This scheme is not available in Wales, Scotland and Northern Ireland.

We’ve also got Innovate UK, the government’s innovation agency. It offers loan funding to innovative startups with small businesses working on research and development projects.

Also key to this is the British Business Bank, a government-owned economic development bank that provides various financing options including loan programmes to support startups and small businesses. While not specifically offering unsecured loans, the BBB works with accredited lenders to provide financing solutions tailored to the needs of startups.

Over the years there have been other schemes which have been withdrawn and replaced. Your advisor can help you navigate through the current options.

What are the common challenges or obstacles that startups may face when applying for an unsecured business loan?

Your limited operating history carries a high risk perception. You’ve got a lack of collateral and normally you’ll find there are stringent eligibility criteria.

Startups can improve their chances of securing finance by presenting a strong business case, demonstrating their ability to repay the loan and also exploring alternative funding options.

Do you have any examples of successful startups that obtained unsecured business loans and how they used the funds?

There are numerous success stories. Let’s start with Brewdog – a Scottish craft brewery. That’s a notable example of a successful startup. They managed to use unsecured business loans to fund their growth.

Back in 2011, Brewdog launched a crowdfunding campaign offering shares in the company to the public. Through multiple rounds of crowdfunding they raised millions of pounds in unsecured loans from investors. That enabled the company to expand its production capacity, open bars and launch their innovative products.

The next one I can think of is Monzo, the digital bank. They were established in 2016 and raised £1 million through crowdfunding. A couple of years later they raised a further £20 million in unsecured debt, again through crowdfunding. They used those funds to support their continued growth and product development, scaling up their operations and technology to help improve that banking experience for its customers.

Similar to Monzo is Revolut, a fintech startup offering digital banking services. They managed to raise millions in unsecured debt – some say almost $500 million. Another interesting one we may have all used is Deliveroo, the food delivery platform. They were founded just over ten years ago by two friends who secured their investment through venture capitalist firms.

They gained further funding to expand and upgrade their technology and infrastructure. It has made a real contribution to the economy – Rishi Sunak even called it a true British tech success story. The company was floated on the stock exchange in 2021 and Amazon has
a stake in this business.

Are there any specific industries or sectors that lenders may be more cautious about for unsecured loans for startups?

Highly regulated industries like healthcare, financial services and pharmaceuticals face increased scrutiny from lenders due to the complexity and the potential legal risks associated with regulatory compliance. Startups in these industries may find it more challenging to obtain unsecured loans.

You’ve also got cyclical industries such as construction, property, manufacturing and hospitality. These experience fluctuations in demand and revenue throughout the economic cycle, so lenders may be cautious about extending loans in these industries – especially during economic downturns or periods of market volatility when business prospects are quite uncertain.

Technology and innovation startups offer significant growth potential as with Deliveroo – but they also face higher risks associated with innovative market competition and rapidly changing technologies. So lenders are more cautious about providing unsecured loans in this area, especially to those developing new products or services with unproven market demand or revenue potential.

Startups with limited market demand in a niche or a specialised market may face challenges in demonstrating scalability and long-term viability. For those that watch Dragons Den, you often see the dragons scrutinise small businesses: where is the growth, where is the profit? That’s what the investor is concerned about.

Also there are some emerging industries as we’ve seen over the years – such as renewable energy, blockchain and artificial intelligence. In these emerging areas business models and revenue streams are untested or still evolving. They pose a higher risk. so lenders are a lot more cautious.

What documentation and financial information should startups have prepared when seeking an unsecured business loan?

You’ve got to be prepared. There are various things to get ready.

Business plan. Make sure you’ve got a detailed business plan outlining your objectives, market analysis, competitive landscape, target customers, revenue projections, your growth strategies and the organisational structure.

This business plan provides lenders with the insights into your business and your model for growth.

Financial statements. If you have been trading already, prepare income statements, balance sheet and cash flow statements to provide an overview of your financial performance and position. Lenders are keen to assess your profitability, liquidity and how you can generate cash flow to repay this loan.

Cash flow projections. Help the lenders evaluate how you can meet your loan repayment obligations, and see that you’re managing your working capital effectively.

Personal bank statements. Business owners and directors may be asked for personal statements. These really tell a lender a lot about you as a business owner – your financial behaviour and how it will translate into the business.

Credit reports. You will have your business credit report done as well as your personal one. It’s key to obtain this yourself first. Prepare yourself in case the lender has unanswered questions.

Tax return documentation. If you’ve been trading, get these together.

Legal documentation. Collect any documents from when you set up your business. Depending on your industry there may be business licences, permits, certifications or regulatory approvals. These will be needed as part of the compliance process.

Generally, be prepared to answer any questions or provide additional information requested by lenders during the loan application review process.

What’s the process in applying for and obtaining an unsecured business loan for a startup?

There are several steps and the specific process will vary lender by lender.

Before you apply, you should thoroughly prepare by gathering all the necessary documentation and financial information. The next step is sourcing – and that’s where we can help as brokers. We assist clients to find the right lender based on your criteria.

Once we have a chosen lender we submit a loan application. Once it’s on the other side there’s the review and underwriting. The lender reviews the financial information, your credit history and business viability to assess your creditworthiness and eligibility for the loan.

Lenders carry out due diligence to verify the accuracy and the completeness of your financial information and documentation. That’s where there may be a request for additional documents.

If your application is approved, there’s a loan offer outlining the terms and conditions of the loan including the amount, interest rates, repayment terms and fees. Once you accept and sign the loan offer, we get all the necessary paperwork completed and then the funds are then dispersed into your business bank account.

You’re now responsible for paying the loan according to terms of the agreement and you start making your regular payments. Throughout the loan term, lenders may monitor your financial health. They may request that you periodically send through financial reports or updates to assess your ongoing credit risk.

It’s essential for startups to thoroughly understand the terms and obligations associated with the loan and maintain that proactive communication with the lender throughout.

How long does it take to receive funding once a startup unsecured business loan application is approved?

It does depend on several factors including the lender’s internal processes and the complexity of the loan application. But typically you receive funding within a few days to a week or two after loan approval. It is quite quick compared to a mortgage.

What’s the maximum loan amount a startup can typically expect with an unsecured business loan?

It’s down to the lender’s policy, the financial profile, your creditworthiness and your repayment capacity. Generally, unsecured business loans tend to have a lower maximum loan amount compared to secured loans because there’s no collateral.

But it varies from lender to lender. The general range is from a few thousand pounds up to £250,000 or more, depending on the lender’s risk appetite and your financial strength.

Some lenders may offer higher maximum loans for established businesses with strong credit histories and proven revenue streams. Deliveroo, for example, managed to secure a lot of money, while others may cap the maximum loan for startups.

Are there any alternative financing options or strategies that startups should consider alongside unsecured business loans?

Yes. There are a few options to explore.

Self-funding, known as bootstrapping, is where you just use your personal savings, credit cards or the revenue generated from your sales. You maintain full control over your firm and avoid taking on debt. It does require you as the founder to invest your own resources. That can limit your growth based on the funds you have available.

Equity financing is where you raise capital by selling ownership stakes in the startup to investors such as venture capitalists, crowdfunders or angel investors. Angel investors are individuals like you see on Dragon’s Den. In exchange for funding, investors receive equity ownership in your business and a share of your future profits. It’s a great way to fuel growth and expansion, but it does dilute the ownership of your business.

Revenue based financing involves capital raising by selling a percentage of your future revenue to investors, in exchange for upfront funding. This gives startups access to capital without diluting ownership or taking on debt repayments. Instead, investors receive a share of the startup’s future revenue until they recoup their investment. There’ll be a predetermined return that they’ll put in the contract.

It can be attractive for startups with predictable revenue streams, as they know there’s definitely going to be a profit coming.

Grants and awards may be available for some startups. Funding can be offered by government agencies, nonprofits or private foundations. The great thing about a grant is that it doesn’t require repayment, making this an attractive financing option for startups. But they often have very specific eligibility criteria and are very competitive to obtain.

Invoice financing, also known as invoice factoring, allows a business to unlock cash tied up in unpaid invoices by selling them to a third party financer at a discount. It provides immediate cash to you as a startup and improves your working capital. However, it may involve fees and does require the business to offer a percentage of that invoice value.

Business lines of credit provide a revolving credit facility to cover short-term expenses or finance any growth initiatives. Unlike loans, lines of credit allow a startup to borrow on an as-needed basis and repay over time. Lines of credit can be secured or unsecured depending on the lender’s requirements and your creditworthiness. An example of this would simply be a business credit card.

Supply funding is also known as trade credit or vendor financing. You can try to negotiate extended payment terms with your suppliers for goods or services. This can preserve your cash flow and give you inventory or resources without you paying immediately.

How does the economic climate or market conditions impact the availability of unsecured business loans for startups in the UK?

[podcast recorded in March 2024]

Factors such as interest rates, inflation, GDP growth and unemployment rates can all influence lenders’ risk appetites. It changes their lending policies and their willingness to extend credit to new businesses.

Startups should closely monitor these economic trends and stay informed about changes in lending policies and try to adapt financing strategies accordingly.

Or, consult with a financial advisor or business professional – we can help you navigate through this evolving economic landscape as best as we can.

The content provided in this podcast is for informational purposes only and does not constitute financial, investment, legal, or any other form of professional advice.

Listeners are encouraged to conduct their own research and consult with appropriate professionals before making any financial decisions or taking any actions based on the information provided in this podcast.

GRAND UNION FINANCIAL IS THE TRADING STYLE OF WOODLEY LIMITED, WHICH IS AUTHORISED AND REGULATED BY THE FINANCIAL CONDUCT AUTHORITY. THE FINANCIAL SERVICES NUMBER IS 918604. WE ARE A CREDIT BROKER AND NOT A LENDER.