unsecured business finance

unsecured business finance

Exploring the Impact and Strategies of Unsecured Business Finance

1. Introduction to Unsecured Business Finance

Unsecured finance, in contrast, is not backed by tangible collateral. At a fundamental level, it is predicated upon the existence of individuals (albeit typically hidden behind corporate veils) with assets and net worth to which “contracting around” is possible. In return for this “contract,” the lender will attach conditions to the contract including, possibly, the declaration of dividends, limitations upon leases and capital expenditure, underwriting new issues, and so on. There will also be “restrictive covenants” forbidding the business both explicitly and in a catch-all category defined as “and other undertakings.” Indeed, for the funders to “participate” directly in any aspect of the day-to-day management or direction of the firm is likely to be very rare, falling into a category defined as “Always allowed with 100% of the lenders’ agreement.”

So, what is UBF? Well, on the one hand, UBF is easiest to describe as what it is not. Unsurprisingly, therefore, the starting point for this discussion is what has traditionally (and perhaps, at the end of this report, overly expansively) been understood by the term “secured” finance. With secured finance, the lender does not wholly trust the borrower either to or to be able to fulfill the borrowing commitment that has been agreed. For this reason, lenders (predominantly, but not exclusively, banks and finance companies) require that the borrower provide tangible collateral which could be used or sold to compensate them in the event of default. Typically, and particularly when the asset in question is easily marketable or realizable (short of the ultimate asset value), the security provider will be a real economic asset.

This report is primarily concerned with an ongoing challenge faced by private sector firms (businesses) in the United Kingdom, namely the desired and possible use of UBF. But, in order to locate this issue and to provide a context for understanding, we first need to establish what is meant by UBF, what role it serves in the process of corporate finance, and against what backdrop its changing use in the UK is occurring.

2. Benefits and Risks of Unsecured Business Finance

1.1. Unsecured Business Finance and Its Profile The survey among five native speakers from various universities, academics, and practitioners in economic research was conducted to provide reasonable terminology between finance and its main sources. We found that the terms “business finance” and “business credit” were generally accepted and widely used in practice and that they cover all identified external financial sources. The terminological aspect is significant for unsecured finance, mainly for loans, which are included and not secured in full or in part by tangible assets of the borrower. Unsecured business finance is thus a category of commercial loans that are not secured but are used for working capital, routine operations, entrepreneur initiatives, inventories, supplies, maintenance, and project or property management. The higher relative cost-adjusted for the risk of these loans pays off with the advantages of reducing the required time, particularly of processing documentation and the complexity of lending processes.

Introduction The growth in the volume of unsecured loans and finance options available for small businesses is well-documented in an advanced modern financial system. In addition to traditional sources, a convenient means of providing unsecured finance today is the so-called alternative finance, existing entirely outside the traditional banking regulatory system. Such diversity and wide availability provide small businesses with more options and opportunities to customize their business strategy and select the appropriate financial leverage under certain circumstances or in some specific industries. The aim of the article is to identify unsecured business finance features, its benefits to small businesses, and moreover, particular risks they face and options to minimize them.

3. Key Strategies for Obtaining and Managing Unsecured Business Finance

Our own extensive knowledge of working with actual businesses, many of whom have been developing for owner-managers their business plans for this purpose to include both smaller and larger size alternatives, has convinced us that they can all meet a difference only twice (DOC) test in respect of part or all of the strategies chosen. Such business plans can therefore be viewed as potential rather than a blueprint subject to many chance market conditions events capable of fulfilling such potential to realize similar total proceeds distributions greater than the alternatives threatened by competitive sources of supply.

The three key strategies of developing low risk in obtaining external finance or capital for an unincorporated business from an external provider are: looking for a lender that can use its internal IT system to see the business’s external credit score or other file information about how it sees such trading as affecting the business’s external credit score probabilities, reducing the business’s need for external finance or capital by making it increasingly self-financing dependent solely on the business’s trading, and using ‘five steps to heaven’ for the purpose of growing the business large enough for alternative corporate finance to become available to meet the satisfaction of the owner-manager and his or her family.

4. Case Studies and Best Practices in Unsecured Business Finance

As general guidelines, we suggest that unsecured lending firms “fund the right individuals” by focusing on developing an advanced underwriting algorithm that establishes creditworthiness largely based on the borrower’s complete financial information and industry-specific knowledge. Factors for consideration should include lease payment history, loan obligations, credit card receipts and statements, tax returns, sales and donor history, and income streams. It is of paramount importance that potential underwriters pay attention to and explain their background and growth, cash reserve availability, and business cycle challenges.

Several organizations have sought to fill in the gap of larger corporate to private individual or non-financial institutions business credit access through structured and unsecured opportunities. Although we had the opportunity to analyze several such organizations, only a few opportunities met our standard. However, amongst others, these unique credit access opportunities currently exist for individuals through platforms such as BitBond, MarketInvoice, and Bond Street.

5. Future Trends and Innovations in the Unsecured Business Finance Industry

The future prospects of the unsecured business finance industry are extremely interesting. The period to 2023 is likely to witness a major commercial shake-up of the financial services industry – if the industry players do not adapt. This is largely because of three global reasons – entrepreneurs the world over need greater sums of capital for their business creations, in increasing amounts. The Asian nations in particular recognize that a strong Small and Medium Sized Entity (SME) sector will help secure political stability and reduce social problems relating to a growing and underemployed population. Institutional and other lenders are no longer willing to fund SMEs in the same way as they have in the past – the amount they can lend and gains they can achieve from each SME are minimal compared to a large company, but the risk is higher. The solution will come from the emergence of a breeding ground of new generation innovative fund providers whose business is to recognize the potential of SME businesses and provide them with industry-relevant funding. These new generation lending and investment functions are often funded largely by society as a whole, but giving society as a whole a direct and material link to the capital results.