Everything you need to know about unsecured business loans from the ground up, helping you understand business finance.
Getting the ball rolling is often one of the toughest challenges faced by small businesses in the UK. Having access to the types of funding which enable speedy growth and flexible expansion is vital in order to allow businesses to make the most of opportunities as they come along, but many of the most powerful financial options are only available to large, well-established businesses. The ability to access funding as and when it’s necessary is vital in any industry, and in many cases an unsecured business loan is the ideal solution for companies that need to make some space in their bottom line.
As with all financial products there is a cost associated with an unsecured business loan. It’s important that business owners carefully consider their position before committing themselves to a particular product, and they should consult an experienced financial advisor before taking out a loan of any type. In this article we’ll discuss why an unsecured business loan can be indispensable to the growth of a small business, and some of the key terms and conditions associated with this type of finance.
There are many reasons why a business might need to take out a loan; to meet an unplanned expense, to help accommodate the cost of taking on a new job, to refurbish new premises, or to help even out their cash flow. A business loan is a way to generate the necessary capital to meet these needs, and as long as the terms of the loan are suitable they can be a valuable tool for any business.
In contrast to other forms of finance, unsecured business loans are often available to smaller companies - large secured finance loans and trading facilities are typically the preserve of corporations who need multi-million pound finances. For small businesses who need to refurbish a building or purchase new stock, a loan of a few tens of thousands of pounds can be exceptionally helpful, but many other forms of finance require much higher sums to be trading hands.
An unsecured business loan is generally appropriate when smaller sums are required. Although loans as small as £5,000 can be obtained, some lenders will approve loans of several hundred thousand pounds without requiring any security, which means that unsecured business borrowing can be used to help purchase property or significantly expand a business’ operations.
What makes an unsecured business loan so unique is how easily and quickly it can be put into place. Since there is no need to provide security in the form of assets or property the borrower can simply take on personal liability for the loan, which negates the need for lengthy property valuation checks. Because the borrower is taking on the loan personally, the terms of the loan are also not dictated by the assets they’re securing the loan against; most secured loans are defined by the amount of security the borrower can provide, which inhibits the terms the lender can agree to. With an unsecured loan, though, it’s possible to alter every aspect of the deal so that it suits both the lender and the borrower alike.
Secured loans give lenders the ability to recoup any unpaid money through the sale of the borrower’s secured assets. However, an unsecured loan doesn’t prevent them from recovering their loan if the borrower should fail to repay; instead of recovering the money directly through the sale of an asset, though, they’ll need to pursue the borrower personally. This can be a difficult task, so unsecured business loans cannot generally provide the same level of finance that secured loans can. However, the needs of a small business can generally be met by an unsecured loan, since it’s still possible to access substantial funding without offering security.
As mentioned previously, unsecured business loans benefit from increased flexibility in comparison with secured loans. The ability for lenders to set the terms of their loans more freely enables a wider variety of products to be made available, so business borrowers can take advantage of a wide array of loan types. While each and every lender will offer different combinations of terms and conditions, the general outline of a loan will follow the same principles:
Repayment Term: This is the length of time in which the loan must be repaid. Often unsecured loans can be arranged for a short amount of time (which can be useful to help finance a one-off expense), or for a period of up to 10 years. Keep in mind that the longer the loan’s term, the lower the interest rate typically is - this helps to offset the longer period in which you’re paying interest. However, while the interest rate may be lower overall, if you’re making smaller repayments your total interest bill might well end up being higher; check carefully to see what term length will work best for you.
Interest Rates: This is the amount you’re charged on the total capital you have outstanding. Unlike with mortgages, the interest you pay is dependent on the actual amount of money you’re currently borrowing; if you owe £10,000, you’ll pay interest on this amount. It’s therefore in your interests to repay as much of the capital as possible as quickly as you can to help minimise the costs of servicing the loan.
Repayment Schedule: Some lenders have a traditional repayment schedule with a fixed monthly bill, but others offer a flexible approach that allows borrowers to “repay as they earn”. Because the amount the borrower repays reflects how well their business is doing, the loan becomes less of a burden on their bottom line. Flexible repayment schedules can be very valuable for small businesses operating in a “feast or famine” sector like tourism, as it helps them to mitigate the impact these fluctuations have on their business.
Borrower Requirements: As an unsecured loan is personal, the borrower should have a good track record of trading profitably. Some lenders require several years of accounts books, but this will vary between lenders. Unsecured startup finance can also be obtained, which usually does not require any evidence of prior trading.
A bridging loan is a short-term loan secured against property. It allows you or your business to “bridge a gap” until either longer-term finance can be arranged, or the underlying security or other assets can be sold.
A vast majority of businesses will use property or land as security when taking out a bridging loan. There are however a small number of specialist lenders that are prepared to secure bridging loans against equipment, the value of unpaid invoices and projected future sales or even against equity in the business.
A business bridging loan can be used for a huge variety of different purposes. Most commonly they are used for major purchases such as property, for new equipment and machinery as well as to acquire stock. They can also be used as working capital and by new businesses that require a cash flow injection.
Yes. The owner or directors of a business can raise money from their private residences provided the loan proceeds are purely for business purposes. There cannot be any element of private or personal capital raising.
As mentioned above they can be used for mixed use properties. To qualify for a business bridging loan the overall use of the property being used as collateral will need to be at least 40% commercial. For example, if the property is a rental unit with a flat above the commercial part of the property would have to represent more than 40% of the total property. Furthermore, most lenders would also insist on a separate entrance to the flat.
Yes. Whilst not as widely available as 1st Charges some lenders will happily write 2nd charge business bridging loans.