Unsecured Small Business Loans
Businesses typically use unsecured business loans to cover initial cash flow and inject working capital to expand existing businesses in the longer term.
An unsecured loan is not secured on any asset for a Limited Company or personal assets such as a house if you're operating a business as a sole trader.
The nature of this arrangement means if the person taking the loan defaults, then no assets are taken in payment of the loan, although the person is personally liable for making any repayments.
These types of loans are normally short term in nature and last for one to three years and are generally under £10,000. Most unsecured loans are provided by the major banks although there are plenty of other institutions and brokers that can assist in getting the cash for your business.
Why get a small business loan?
Almost all new businesses need working capital or cash flow in the first few months or first year of operating. These types of loans cover the start-up costs of purchasing new stock, machinery or other assets to kick-start the business in the early stages.
When businesses are operating successfully, they may need some short term loan or overdraft facility if the sales revenues are not being paid on time and they need to pay some invoices or salaries.
Some businesses rely on this type of short-term lending exclusively to operate on a daily basis, but most new businesses should pay off all loans after two years or so.
Purposes for business loans
Unsecured business loans are available for almost anything for starting a business. In some circumstances, the cash is used for:
- Purchasing stock for working capital.
- Paying wages and salaries for employees.
- Buying land or office premises.
- Purchasing plant and machinery.
- Renovating office space or warehouse space.
- Purchasing assets.
- Buying other companies and their assets.
- Business expansion.
Most loan companies including banks will consider all circumstances, and they'll require an up to date and current business plan to asset the risk for new business loan applications.
Searching on Google will bring up many loan providers. Many will want to charge you an interest rate that could be three or four times the current bank base rate which could make it expensive to operate such a loan. For unsecured loans, the risk is higher so the charges will be higher.
Secured loans are less of a risk for lenders because they have a charge over any assets if the company or person defaults on their agreement. If the company is a sole trader, then the lender will claim personal assets such as property.
Other loan providers can help getting unsecured business loans if the business owner has an adverse credit history (for example CCJs, IVAs or a short term history of self employment) - as the risk is higher the APR or annual percentage rate of interest will be higher - sometimes on a par with credit card interest rates.
It's best to shop around for the best deal to compare quotes and details of interest rates.