Getting small business finance isn’t easy. Very often you need to offer significant assets as security—and very often you don’t have significant assets to offer. As a result, you could find yourself turning to your personal assets and putting your home on the line.
So how do you get the finance you need without risking the roof over your head?
Secured and unsecured business loans – the difference
As the name suggests, a secured loan is offered against a specific piece of collateral. Fail to repay and the lender can seize that asset. With an unsecured business loan, there is no such arrangement and should you fail to repay the lender would need to go down the route of obtaining a court judgement to realize the value of your assets—a much longer and more complicated procedure. As a result, unsecured business loans are much riskier for the lender and much less risky for the borrower, and consequently tend to be harder to obtain (not to mention more expensive).
An alternative to securing a loan on an asset is offering a personal guarantee. This means that if your business cannot repay the loan, you will do so out of your personal funds. Should you decline to do so, the lender can sue you personally—not just sue your business—to recover the money. Even if your business is a limited company or limited liability partnership, the personal guarantee is likely to override that protection.
But if you don’t want to take the risk, what are your options?
Five ways to attain unsecured business loans
- Talk to an alternative lender. Alternative lenders apply different criteria from banks and may be willing to consider unsecured lending when mainstream lenders are not.
- Investigate peer-to-peer lending. This innovative approach matches borrowers with private lenders, usually via specialist websites.
- Take out a line of credit. Many business lines of credit do not require any collateral. However, you will need an excellent credit score and a proven record of business success.
- Apply for a business credit card. Although expensive, credit cards offer unsecured lending and complete flexibility when it comes to drawdown and repayment.
- Choose invoice factoring or discounting. These solutions enable you to borrow against the value of your invoices as soon as you issue them, with repayment being made when your customers pay you.
As can be seen, securing an unsecured loan isn’t easy—or cheap. But if you don’t want to put your home and your private wealth on the line, there are a number of other options.
Author: Carl Faulds is the managing director of Cashsolv, Carl offers advice and alternative finance support to overcome cash flow problems and identify possible underlying problems that can be addressed to ensure a positive future for your business.