Small Business Loan

When banks and other providers advertise small business loans, they are usually referring to unsecured term loans. This is when your borrow money for a defined period of time, usually a few years, and are not securing the loan against an asset such as a vehicle or property. You agree to make regular repayments, often monthly, to the lender until you have paid down the entire loan. Each repayment consists of both the accrued interest and a fraction of the original loan (the principal).

Quick Facts

  • Terms typically range from two to five years and there may be an upfront fee or early repayment penalty. If you’re borrowing for a short period, it may be better to use an iwoca credit facility.
  • Loan amounts normally from £1,000 – £25,000, depending on your revenue, company age and business performance, although larger amounts are available from some providers. These may be classed as commercial loans.
  • Lenders will look at your business trading history, personal credit score and business credit score to decide if they’re willing to lend to your business.
  • Most lenders will ask you for a personal guarantee in place of security. This means you will be personally liable for the loan if your business can’t afford repayments.
  • The interest rate will generally be higher than with a secured loan. However, you may need to pay a large upfront fee with a secured loan because the lender needs to value your assets and arrange the paperwork

How does an unsecured small business loan work?

The lender will usually check your credit rating and trading history to make sure they’re happy to lend to you and to decide how much you can borrow and the terms you’ll be offered. How long this takes can vary widely between providers

You and the lender will agree on a loan term (the length of time you have to pay back the loan) and an interest rate, which may be fixed or variable. Sometimes, you’ll be asked for a personal guarantee. This means that you (or another guarantor) agrees to be personally responsible for the loan if the business is unable to repay it.

The loan will then be paid to you, and you will begin making monthly repayments according to your loan agreement. If your business misses loan payments, you may face charges, or be asked to repay the loan in full. It will also damage your credit score if the lender reports the missed payment back to a credit agency.

How much does an unsecured small business loan cost?

As well as paying interest on your loan, you’ll usually need to pay an upfront arrangement fee of around £100. Make sure you take this into account when comparing costs.

Interest rates for unsecured business loans are typically around 7% to 15%, but the interest rate you’re actually offered will depend on several factors, including your business’ trading history, the current Bank of England base rate and the lender you choose. Barclays have a handy calculator for understanding the cost of a small business loan depending on the rate and term but note that it does not include the upfront fee.

If you take out an unsecured loan with a variable interest rate, the interest can go up or down as economic conditions change. If you have a fixed-for-term rate then you’ll pay a set amount and your interest rate will not change no matter what happens with the economy. The benefit of a fixed rate is that you’re able to predict your repayment amounts. If you choose a variable rate then it will usually go up or down depending on the Bank of England base rate, which is currently at a historically low 0.25%. That means a variable rate is likely to increase in the future.

There’s one final, slightly complicated option – your rate may be fixed for a certain period and then switch to variable. When you’re choosing between a fixed and a variable rate, you should think not just about which is currently cheaper, but also whether you’re confident that you would be able to pay if you chose a variable rate and your repayments went up.

Most of all though, don’t only focus on the headline rates. Consider the upfront fees and early repayment charges or minimum terms. If you suddenly find you have extra cash available before the end of your loan, you’ll save a lot of money if your lender allows you to repay early with no penalties.

Typical Example

The owner of a local gym needs to carry out some refurbishment work and decides to take out an unsecured business loan to cover the costs. He wants to borrow £30,000 over a period of two years so submits an application to his bank. They check his trading history and credit history and approve him for the full amount. He takes the money to pay for the refurbishment, then repays over the following 36 months.

Frequently Asked Questions

What’s the difference between a secured and an unsecured loan?

They serve a similar purpose and have a similar structure, but you will have offered some assets as security in the case of a secured loan. This means that if you don’t pay the loan then the lenders may seize the assets. The advantage of a secured loan is that it can help you get a lower rate over the long-term but an unsecured loan may be easier to arrange, particularly if you don’t have suitable assets available.

Where can I get an unsecured term loan?

You can get an term loan from your bank or from an online lender such as Funding Circle. Check that the company is authorised and regulated by the Financial Conduct Authority (FCA) and take a look at online feedback and reviews from customers. iwoca doesn’t offer term loans but instead offers small business credit facilities. These may be more suitable if you want additional flexibility or just need the funds for a short period.

What happens if I miss a loan payment?

If you miss a payment, your lender may levy a charge but will also try to work with you to help you get back on track. If you co-operate then this may involve giving you a payment holiday or putting you on a repayment plan. However, if you do not co-operate the lender may take legal action. If you’ve signed a personal guarantee, your lender can pursue you for the money if your business is unable to pay.

Alternatives to an unsecured loan

If your business just needs a cash injection – perhaps to help with everyday cash flow gaps – a credit facility or overdraft may be a better option. If you know you need funds for a few years but you can’t get approved for an unsecured small business loan then it may be worth applying for a secured loan if you have appropriate assets.

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