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 usually 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.
Differences Versus a Secured Loan
As the name suggests, a secured business loan has a charge over an asset that the company offers as security in case of a default on the payment terms. There are other considerations for this type of financing:
- No asset security usually required.
- A personal guarantee could lower the interest rate charged.
- The process of receiving your money is faster than other methods.
- There may be additional fees involved.
- The overall cost of the loan is higher due to the nature of the risk.
These types of loans usually finance cash flow or working capital rather than property purchases where commercial mortgages come into play. Most lenders offer flexible solutions with repayment terms lasting from a few weeks to many years.
Business loans with no security are usually easier to get but there are higher interest rates charged.
Why Get an Unsecured Loan?
Almost all new businesses need working capital or cash flow in the first few months or first year of operation. 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 a short-term loan or overdraft facility to finance working capital if they have invoices or salaries to pay.
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 of Business Loans
Unsecured business loans are available for almost anything for starting a business. Here are some examples of the uses of such finance:
- Purchase stock for working capital.
- Paying wages and salaries for employees.
- Buying land or office premises.
- Plant and machinery investment.
- Renovate office space or warehouse space.
- Purchasing assets.
- To buy 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). In these cases, the risk is higher so 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.