Business Loans
Secured and unsecured business loans are the most common types of finance options for small and medium-sized enterprises (SMEs) in the UK.
Unsecured
Business Loans
Definition: Unsecured loans do not require collateral, relying on the borrower's creditworthiness and business financials for approval.
Collateral: Since there is no collateral involved, these loans are riskier for lenders.
Interest Rates: Unsecured loans typically have higher interest rates than secured loans due to the increased risk for lenders.
Risk and Eligibility: These loans are suitable for businesses that may not have significant assets to offer as collateral. However, approval may depend more heavily on the borrower's credit history, business revenue, and financial stability. Personal guarantees will be required for unsecured loans.
Amounts: Unsecured loans typically range between £1,000
to £2,000,000
Secured
Business Loans
Definition: Secured loans require collateral, which is an asset that the borrower pledges to the lender as security for the loan. If the borrower fails to repay the loan, the lender can seize the collateral to recover the outstanding amount.
Collateral: Collateral can include business assets such as property, equipment, or inventory. Lenders will also allow personal property.
Interest Rates: Secured loans often have lower interest rates compared to unsecured loans because the collateral reduces the lender's risk.
Risk and Eligibility: These loans are less risky for lenders, making them more accessible to businesses with valuable assets. However, if the borrower defaults, they risk losing the pledged collateral.
Amounts: Secured loans typically range between £10,000 to £50,000,000
Merchant
Cash Advance
A Merchant Cash Advance (MCA) is a financial solution where a business receives a lump sum of capital upfront in exchange for a percentage of its daily credit card sales, plus a fee. It is a form of alternative financing that is particularly suitable for businesses with fluctuating or seasonal revenue.
Unlike traditional loans, MCAs offer quick access to funds without requiring collateral or a fixed repayment schedule. Repayments are automatically deducted from the business's daily credit card sales until the agreed-upon amount, including fees, is fully repaid. This funding option is often used by businesses seeking rapid and flexible capital to address immediate financial needs or seize growth opportunities."
Revolving Credit Facility
A revolving credit facility is a financial arrangement that provides a borrower with the flexibility to borrow, repay, and borrow again up to a predetermined credit limit during a specific period. It is a form of credit that allows businesses or individuals to access funds as needed, rather than receiving a lump sum upfront.
Key features of a revolving credit facility include:
Credit Limit: The lender establishes a maximum amount of credit that the borrower can access. This limit is based on factors such as the borrower's creditworthiness, financial strength, and other relevant considerations.
Flexibility: Borrowers can use the funds as needed, up to the specified credit limit. They can borrow, repay, and re-borrow without having to go through the approval process each time.
Interest Charges: Interest is typically charged only on the amount of credit used, not the entire credit limit. The interest rate may be variable or fixed, depending on the terms of the agreement.
Repayment Terms: Repayments are often structured in minimum monthly payments, and borrowers have the option to pay off the balance in full or make partial payments.
Renewal: The credit facility is usually renewable, meaning that after a certain period, the borrower can renegotiate the terms and continue using the facility.
Revolving credit facilities are commonly used by businesses to manage working capital, handle seasonal fluctuations in cash flow, or fund short-term projects. They can also be used by individuals for personal financial needs, such as home renovations or unexpected expenses.
Considerations
for businesses
Decision Factors: SMEs need to consider their risk tolerance, the value of available assets and the urgency of funds when choosing between secured and unsecured loans.
Application Process: Secured loans may involve a more extensive application process due to the collateral evaluation, while unsecured loans may have a quicker application and approval process.
Loan Amounts: Secured loans may offer higher loan amounts due to the collateral, whereas unsecured loans may have lower limits.
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