Everything You Need To Know:
Secured & Unsecured Funding What Is A Small Business Loan?
A small business loan is a form of debt financing that enables businesses to fund their operations by borrowing money from a lender. These loans are crucial for small businesses as without them, many would cease to exist. Small business loans provide startups and small businesses the financial boost they may need to succeed. They can be used for a variety of purposes, from managing cash flow to business expansion, and enable businesses to grow whilst keeping costs at a low.
When business owners borrow money from a lender, a repayment plan is agreed as part of the lender’s terms of agreement. The money then gets paid back, with interest, in scheduled monthly payments over a pre-agreed repayment period.
Small business loans fall into two categories:
- Unsecured Business Loans
- Secured Business Loans
Unsecured business loans allow business owners to borrow money without using valuable business assets as security for the lender. This is a popular funding option for small businesses that may not have assets they can provide as collateral for unpaid loan repayments.
Small business loans that are unsecured tend to have higher interest rates and often require a director’s personal guarantee. This guarantee is a legally binding document that makes the business owner personally liable to pay the loan repayments if the business defaults and fails to do so.
At SME Loans we offer unsecured funding products. So please be advised that when you apply for a loan, the lender you get matched with may require you to sign a personal guarantee.
Secured loans, on the other hand, let your business borrow asset-backed funds, using valuable collateral as security for the lender. These loans work best for small businesses that have access to valuable assets that they can use as collateral. When applying for a secured loan, the lender will consider the proposed asset, and may ask for a valuation to be carried out.
Once the asset, loan amount and repayment structure have been agreed on, you will then give the lender ‘charge’ over the item. This ultimately means that the lender will hold legal authority of the selected item if your business defaults and doesn’t manage to pay back the loan.
Please be advised that the amount of money you want to borrow will need to be equal to the value of the item you’re offering as security.
Top Tip: With secured loans, lenders prefer that you fully own your chosen asset. There are two types of assets you can offer to secured loan lenders, but most lenders are more likely to approve hard assets:
|Hard Assets||Soft Assets|
|Commercial Vehicles||Office Equipment|
|Heavy Machinery||IT Equipment|
Reasons To Get A Small Business Loan The Importance Of Business Loans
There are over 5.7 million SME’s in the UK. Research shows that small businesses are reluctant to apply for external funding in the fear they’ll be rejected.
Banks previously dominated the business lending landscape, but as their lending criteria continues to tighten, more and more small businesses are turning to online lenders offering more affordable product options with greater flexibility.
In 2017, over 15% of small businesses said they expected to downsize, close down or hand over their companies, but thanks to huge expansion of the alternative online lending market, access to funding is now available for more businesses than ever before.
5 Reasons To Apply For A Small Business Loan
If your small business is doing well, you might find yourself needing to move to a bigger premise, expand your workforce – or both. Expansion can be expensive, and you may not have the required cash on hand to make it happen, but with a small business loan you could…
2. Purchase Equipment
You might be thinking about ways you can improve your business's daily operations for performance and productivity. Loans allow you to finance the specialist equipment that you need in order to do this.
3. Purchase More Inventory
As your small business grows, you need more high-quality goods and services secured to generate revenue. Raising funds to do this can be challenging, which is why a loan can really come in handy!
4. Training For Staff
It's important for a small business to be competitive in order to grow as an industry leader. Training and developing your small workforce is a good investment and will undoubtedly bring better results for your business in the long term.
Promotion is particularly important for small businesses to gain recognition and sucessfully progress. It can be difficult to source new customers and cliets, but a business loan effectively allows you to invest in the advertising required to achieve this.
Top Tip: For helpful guidance on growing your business refer to gov.uk. You'll find information and advice on how to attract new customers, develop your products and services and train your staff.
Types Of Small Business Finance What Funding Options Are Available?
The great news is that there are a number of different routes you can take. It can be a confusing process determining which product will help best your business, but it doesn’t have to be this way. In this section we’ll help unpack each option clearly and get you on your way to successfully funding your business.
Business Cash Advance
Business cash advances differ to business loans because there is no interest charged. Instead, you agree on a fixed upfront fee with the lender. With this option, lenders work directly with your business’s card payment processing company and analyses recent transactions. Read More »
The amount of money you are offered from a lender will be based on your card sales. The more money you make each month, the more money you will be able to borrow.
When it comes to paying the money back, repayments are taken automatically as a small percentage of future card sales. For each customer card transaction your business processes using a designated terminal, a small amount will go towards paying off the loan.
Business cash advances suit businesses that are seasonal, and process lots of card payments, as unlike loans with fixed monthly repayments, you don’t owe the same amount each month. Payments are based on a flat percentage of card sales which is great if your business is going through a less busy period.
At SME Loans we offer merchant cash advance as one of our funding products. Businesses can receive a cash injection of £5,000 - £500,000 – which they then repay comfortable, using a small % of future customer card payments. « Show Less
Revolving Credit Facilities
Previously, small businesses could turn to business overdrafts to cover gaps in their cashflow. Overdrafts are getting increasingly difficult to secure, so an alternative source is revolving credit. Similar to overdrafts, once a maximum amount of money has been established, business owners can access the pre-approved funds as and when required. With revolving credit, interest is charged on the amount withdrawn whilst it’s outstanding. Read More »
This option is a revolving cycle of withdrawing, spending and repaying that is typically limited to a period of between 6 months and 2 years. Lenders usually look to offer a loan amount calculated as one month’s revenue, but once you’ve made your first repayment you are then able to borrow more.
With this type of borrowing, the main concern for lenders is the amount of regular cashflow in your business’s account - but be advised that with revolving credit, higher fees are charged than with fixed-term loans. « Show Less
Short Term vs. Long Term Business loans
Short-term business loans are usually offered for a period of 6 months to 2 years. Medium to long-term loans have a longer lending agreement typically lasting between 1 to 5 years, and some up to 10 years.
Short-term loans are usually the better option for small business owners. The money is quicker to access, and repayments only have to be made for a limited period. Long-term loans generally take longer to get approved, but suit companies that need a longer amount of time to pay the money back.
The Application Process Why Choose SME Loans?
At SME Loans, we make funding your small business hassle free. The online application can be completed in a matter of minutes, which means you don’t have to waste time booking a lender appointment or waiting weeks to find out whether or not you’ve been approved. We also use 256-bit technology to ensure that all applications are safe and secure, so you’ll never have to worry about your details being passed on to third parties without your permission.
Step 1: Once you know which business finance you’re interested in, as well as how much you want to borrow, click apply and fill out our 1-2 page application form.
Step 2: Shortly after submitting your application you will be matched with the most appropriate loan provider for your business.
Step 3: Once you’ve been matched, you will be redirected to your chosen lender’s site and given the full terms of agreement for your business loan.
Step 4: After you have agreed to the lender’s terms and conditions, the loan amount will be deposited into your account and you will be able to access it within 48 hours. Read More »
The application process will vary depending on which loan product you end up choosing for your business. Whilst the criteria for lending will differ between lender and chosen loan product, there are certain things you should consider when assessing your eligibility:
- A strong business plan detailing how you plan to use the money. This plan should be accurate, realistic but also flexible (considered with and without investment)
- Profit and loss statements
- Verified business history with filed accounts
- Loan amount vs. turnover
- Profit and loss statements
- Credit history
- Compelling reasons for the loan
Get free help and support for your business from the government's business support helpline, including help with tax and guidance for writing a strong business plan.
Our Simple Qualifying Criteria:
- You are a sole trader, micro business, 2 person business or limited company
- Your business is registered and trading in the UK
- You have been actively trading for a minimum of 6 months
- A minimum monthly turnover of £5,000
- You as the business owner is over the age of 18 « Show Less
Choosing The Right Loan For Your Business Pros & Cons Of Small Business Loans
When weighing up the pros and cons, you should think about each factor in relation to your own small business. With the wide array of lenders, products and loan terminology, we know that choosing the right loan can take time. In this section, we'll talk you through the advantages and disadvantages of each product to help you save time and narrow things down.
Pro - You can typically borrow a lot more money with secured business loans, which can be useful for long term investments.
Con - It takes longer to apply for and arrange a secured business loan than with other small business financing options. As there is an asset involved, you normally have to go through the process of organising a valuation and/or inspection, which means it will take longer for the loan to be approved. Read More »
Pro - Secured business loans are generally easier to obtain, particularly if you are high risk in the eyes of the lender. This is because the lender has extra reassurance from the collateral they can claim if things go wrong and you don’t manage to make repayments.
Con - The main disadvantage of secured business loans is the potential to lose your asset if you can’t keep up with repayments. But if you have faith in the ways you are trying to grow your business, repayment shouldn’t be an issue anyway! « Show Less
Pro - The application process for unsecured business loans is faster and more straightforward than for secured ones. You don’t have to go through the extra processes involved with secured loans, which means you can access the money in a matter of days.
Con - Because unsecured loans aren’t backed by collateral, it’s harder for lenders to retrieve the loan if you default on repayments. As a result, lenders usually charge much higher interest rates on unsecured loans than secured loans. Whilst this may appear frightening, at SME Loans we compare small business loans from over 30 lenders to ensure that you receive the lowest interest rates possible, no hidden fees. Read More »
Pro - As the loan is unsecured, you don’t need to provide collateral so you aren’t at risk of losing a valuable business or personal asset if you struggle to make repayments.
Con - Unsecured loans work well if you are considering a loan for a short term. The amount of money you can borrow for your business is relatively low, so if you need to borrow a more substantial sum of money you will be better off choosing a secured loan. « Show Less
Business Cash Advance:
Pro - Business cash advances are a great option if you have bad credit. Lenders will assess your business based on the number of card sales processed each month. This means that a perfect credit score is not necessary providing you are making good revenue each month.
Con - Before receiving your cash advance, lenders will want you to agree to their terms which can sometimes impact how you run your business. Depending on the lender, you might be asked to change card providers and agree not to change business premises until the money is fully repaid. However, as a short-term loan option, these requirements are only ever temporary. Read More »
- Pro - Cash advances are also one of the most affordable ways to borrow. The amount you repay directly parallels the amount your business earns, so there’s no pressure to repay the amount faster than your business can afford to. « Show Less
Top Tip: When you take a business cash advance, make sure you don’t persuade customers to only pay with cash. Lenders see this as a way of attempting to avoid repayments and you could receive a penalty fee if caught.
Revolving Credit Facilities:
Pro - Revolving credit is one of the most flexible forms of business funding. Unlike a loan, you only take the money when you need it and can repay and redraw as often as you like. As well as this, there is no long-term commitment. You can draw funds only once if needed and not use the facility again.
Con - Revolving credit facilities typically run for 1-2 years, so they are also an example of short-term business financing. If you are wanting to make greater investments or in need of longer-term funding, you might want to consider secured loans instead. Read More »
Pro - One of the main advantages of using revolving credit is that you only pay interest when you use the money, rather than for the whole time you are using the facility. Unlike a loan, interest is only charged on the amount withdrawn as it is outstanding, so you are only paying for what you use.
Con - With revolving credit, interest rates are higher than those charged on traditional business loans. However, this is offset by the fact that you only pay interest on funds when they’re withdrawn, so if used correctly they can work out cheaper. « Show Less
How To Choose The Right Loan For Your Small Business
When picking the right loan product, you want to be certain that you've worked out the most practical way of borrowing for your business. To do this, there are some questions you need to ask yourself: Read More »
- How much money does your business need to borrow?
- How long do you need the money for?
- How long will it take you to pay the money back?
- How long has your business been operating?
- What shape is your business currently in financially?
- Will a short-term or long-term loan work best for your business?
- Do you have collateral to offer for a secured loan?
- What is your business’s credit score?
- Do you have any other outstanding loans to pay off?
- Do you have a backup plan if things go wrong and you default on repayments?
Making The Most Of Your Small Business Loan
When it comes to your small business's finance, keeping on top of admin is crucial. Sticking to a budget will prevent you from making common business spending mistakes, and ensure that you use the money sensibly and effectively.
Where possible, it’s a good idea to keep the loan in a separate account to your usual business account, transferring the money across as and when required. This will prevent you from spending impulsively and increase your capacity to make bigger, important investments in the future.
Don’t spend the money in one go. A sudden influx of cash can be exciting and overwhelming so it’s important to stick to your business strategy and loan plans and spend the money wisely.
Maintain a good rapport with your lender. Ensure you’re making all payments on schedule and update your lender on any issues or unforeseen circumstances you encounter with repayments.
Taking Care Of Your Business's Finance How To Improve Your Small Business's Credit Rating
Business credit scores are based on your business’s financial history, and they are used by lenders to decide whether businesses are likely to repay debt. SME Loans aim to match all small businesses with one of our financial products, but it’s always a good idea to check on your business’s credit report, as with a good score, you’re more likely to find finance and you may be offered more competitive interest rates.
As a starting point, here are a few ways you can start to think about managing your credit score effectively:
- Ensure you always pay back loans on time
- File your accounts well before the deadline
- Get your accounts audited to make them more credible
- Keep your personal credit record in good shape
- Complete any questionnaires sent by credit reference agencies
Top Tip: Experian's 'My Business Profile' allows you to see your business’s credit score, showing you the different factors that are influencing your score, enabling you to make important improvements.
Interest Rates & Business Loans
Lenders charge interest on money borrowed, calculated as a percentage of the loan. When it comes to small business loans, lenders will assess your business profile in terms of risk factors, taking various things into consideration. Usually, the higher the risk for the lender, the higher the interest rate will be. Read More »
The interest rate you will be charged is dependent on several factors
- The type of business finance product you choose
- The lender you’re matched with
- How long your business has been operating
- Your credit history
- Verified business history
- How much revenue your business is generating
- Your business plan and strategy « Show Less