Unsecured loans are a popular way of getting funding for your business, because you don’t need to have valuable assets to use as security. However, because the risk is higher, unsecured loans can be more difficult to arrange, which has important implications for smaller businesses particularly. Let’s have a look at unsecured loans, and some of the other types of unsecured lending that can also be useful for small businesses.
Unsecured loans are fast to arrange and there’s no need to have assets — but this makes them potentially more difficult to get for smaller businesses. Because there are no assets being used to back up the loan, the lender’s risk is higher, which in turn means they’ll look more closely at the overall strength of your business.
To be eligible for an unsecured loan you’ll need to be making decent profits and bringing in revenue, and the loan amount usually can’t be higher than 10–20% of your annual turnover. But if you’re successful in getting one, unsecured loans can be a very useful lump sum to put towards growth projects.
Personal guarantees and personal loans
Unsecured loans often require personal guarantees, which are given by individual directors as an agreement that if the business defaults on the loan, they’re personally liable to cover it. This means that the directors giving a personal guarantee are indirectly involving their personal assets, which can be off-putting for some.
A personal guarantee doesn’t mean the lender will offer a loan to any business — they’ll still want to see good profits and overall affordability. But having some skin in the game demonstrates that you’ve got confidence in your business, and a personal guarantee is a strong statement of commitment to the plan.
Along the same lines, some lenders offer director loans, which are technically a personal loan for business purposes. This is sometimes an easier way to get an unsecured loan, particularly if the director has good personal assets and the business isn’t quite strong enough on its own. However, not all business owners will want to be personally committed in this way.
Merchant cash advances
If your company uses a card machine, a merchant cash advance might be another way to get unsecured funding. They’re a kind of revenue loan, where the lender works with your payment provider to look at the last few months of takings to set a loan amount.
This is a great way of agreeing a loan for businesses that might not be able to get one by other means — because the sectors that use card terminals like shops, cafés, bars and hotels can be difficult for lenders to fund. Merchant cash advances are also useful if your business experiences seasonal ups and downs.
Repayments are taken at source as a percentage of future sales, which means they go up and down with your takings. With a merchant cash advance you can usually borrow up to one month’s typical turnover, and it’s very hands-off once everything is up and running. They do tend to be more expensive than standard unsecured loans, but if you’re looking for alternatives, they’re worth exploring.
Revolving credit facilities
If you’re considering unsecured funding to cover short-term expenses rather than for growth, you could look at the various forms of credit line available to businesses. The category is quite broad, but in general you’ll get a credit limit that you can use as and when you need it.
Many credit facilities only charge interest when they’re used, and can be topped up if necessary, which means they’re a useful buffer to have in place if your business is unpredictable. Business credit cards and overdrafts have similar benefits too.
It’s clear there are a few different ways to get unsecured funding, even if your business is fairly small. If you’re doing well and bringing in consistent profits, you should be able to borrow 10–20% of annual turnover unsecured; but bear in mind that a personal guarantee will most likely be required.
Or if that’s not an option, revolving credit lines and merchant cash advances are ways of getting funding for more day-to-day cash flow requirements, which in turn could free up the capital you need for longer-term growth projects. Whatever you choose, unsecured finance can be a great way to take your small business to the next level.
By Conrad Ford, chief executive of Funding Options