Are you about to launch a new venture? Or perhaps you’re planning ahead for a seasonal dip in income and want to boost cash flow. Maybe you’re expanding and need bigger premises, new equipment and more staff.
Launching or growing a business inevitably involves investing money. An injection of capital can give you the stability and freedom to get things off the ground or take your enterprise to the next level. This is where small business loans come in – when you find the right lender, the funds can be a lifeline.
Focus on alternative finance
The options are numerous – which is great news for all smaller ventures – but identifying the loan that best suits your business is essential to securing funding in the first place, not to mention having a loan that’s affordable.
Lenders apply their own criteria, payment terms, interest rates, and requirements for collateral as security (more about that in a moment). It’s worth focusing on lenders in the mushrooming alternative finance sector, whose terms tend to be more flexible and suited to SMEs.
Secured or unsecured loans?
First, let’s look at the basic differences between secured and unsecured business loans.
You can typically borrow more with a secured loan than with an unsecured loan – some lenders offer in excess of £1 million in fact. Secured loans generally offer lower interest rates too.
One point worth mentioning is that because you can borrow larger amounts with secured loans, lenders need to reduce their risk by asking you for security on the loan. So they’re likely to ask you to provide collateral as security against the loan. Then, if you default, the lender has a higher chance of recovering the money you owe.
Think of it like a pawn shop: you provide an item to the lender who evaluates the asset and decides how much you can borrow based on its value. It may be a simplified comparison, but it illustrates the basic idea.
Company collateral as security
When businesses apply for large loans, they’re likely to be asked to pledge company collateral as security. What lenders want as assurance varies, but you should expect to pledge assets such as the following:
- Commercial property
- Fittings and fixtures
- Or, instead of individual assets, some lenders request the net worth of all assets
The value of your assets must be sufficient for a lender to justify giving you the loan.
As well as providing company collateral, you may be asked to give a personal guarantee as additional assurance for the lender, making individuals liable for the loan. Lenders’ requirements vary but often depend on your company status – we explain more below:
If you’re a limited company or LLP
- If you have a limited company or limited liability partnership (LLP), the majority of lenders will expect you to provide a personal guarantee alongside company collateral.
- Directors or shareholders with a minimum of around 20% to 25% share in a limited company are also likely to be asked to provide a personal guarantee.
If you’re a sole trader or partnership
- When it comes to sole traders and partnerships with unlimited liability (not LLPs), the rules are different when it comes to any kind of loan: you’re always personally liable, and, as a result, you won’t be asked to put up any company collateral.
Since each lender has a different approach to decision-making, always look closely at lenders’ terms.
Another point to highlight: if you refuse to provide a personal guarantee this could reflect badly on your application - and your intention to pay back the money. So regardless of whether you’re a sole trader, a partnership, a limited company or LLP, be prepared to provide a guarantee such as residential property or valuables such as jewellery.
Secured loans = flexible terms
In return for security, lenders can be more flexible with their terms, giving borrowers competitive interest rates and long repayment periods – anything between 2 and 10 years.
On the other hand, if you’re a shoestring startup or a new business yet to build up valuable assets, you might not have enough collateral to put up for a large loan. If this sounds like you, then an unsecured loan could work better for you – but you still need to weigh up the pros and cons.
Whatever you do, choose your small business loan wisely, and you must be confident that you can pay back the loan or you may risk losing the company and personal assets.
Your first step on the road to funding
Since lenders have their own criteria and meticulous assessments, it’s worth talking to them directly. In fact, a chat with one of the experienced relationship managers at Fleximize is a great place to start. As innovators in lending to SMEs, our team understands the demands of small business finance, and the significance of such a serious financial commitment. Call us on 020 7100 0110.