Business decisions require just as much – if not more – care and consideration as those we make with our personal finances.
Before purchasing any goods or services – including the effective “purchase” of a business loan – therefore, a number of basic decisions need to be made:
- what is the purpose, what are the needs and requirements of the business for a particular loan;
- what types of loan are available in the market – including the respective repayment terms, secured or unsecured, fixed or variable interest rates, amount of borrowing and ease with which the loan might be arranged; and
- what is the cost to the business – both short and long-term – of the loan.
Each of these questions is a fundamental preparation enabling you to compare business loans – and their importance might be illustrated by a simple comparison of the two principal kinds of loan arranged by most businesses.
Secured loans
Just as the term suggests, these are loans secured against assets belonging to the borrower – security is provided by the lender being able to repossess the assets if the borrower defaults on repayments, in order to recover any outstanding balance on the loan
The lender is likely to look for such security if an especially large amount of borrowing is requested, if repayment needs to be spread over a long period of time, or if the borrower’s credit status is less than one hundred percent.
Although the security may give some lenders the confidence to advance the requested funds at a lower rate of interest than might be required if no security is offered, it is important to remember that interest is payable over the entire course of the loan – and if the terms are relatively long-term, that might entail a large amount of interest repaid over time.
Moreover, many secured loans are advanced on the express understanding that interest rates may change – monthly repayments may increase, generally in response to increase in the underlying Bank of England base rate of lending.
Secured loans – disadvantages to businesses
The variable interest rate that accompanies many a secured loan presents any business with a potential difficulty when it comes to cashflow management.
Any increase in the rate of interest increases the amount of the monthly repayment (or requires a renegotiation of the length of the borrowing) and, depending on the size of the loan, this may have a considerable impact on monthly cashflows.
Even putting the impact of any increase in interest rates to one side, the long-term nature of most secured borrowing means that a substantial sum is paid in interest over the life of the loan.
Finally, the assets used to secure the loan remain at risk if your business encounters financial difficulties and repayments are defaulted. Whether these were business or personal assets, they may be repossessed by the lender as a last resort in attempting to recover any outstanding balance on the loan.
Unsecured loans
As credit reference agency Equifax explains, an unsecured loan requires no such guarantee by way of assets pledged to secure the loan.
Since any lender is taking a higher risk in advancing an unsecured loan, this may be counter-balanced by the borrower’s healthy credit rating and the financial standing and status of the business – so that professional practices, for example, might typically lay claim to just such a credit status.
That is one of our guiding principles here at Professions Loans and our focus on arranging unsecured loans for professional practices.
Not only do we arrange loans which are unsecured – and therefore carry none of the risks to your business that a secured loan may have – but they are also at a fixed rate of interest throughout the term of the loan. This means that there are no nasty surprises in monthly repayments suddenly rising and presenting additional problems for your cashflow management.
Our unsecured, fixed rate loans are also very flexible in terms of the amount you want to borrow and the period over which the loan is to be repaid – typically from six months up to five years.
The short-term nature of the loan means that your business is exposed to less onerous a commitment than with a secured loan and the shorter repayment period of course means that considerably less interest may be repayable over the life of the loan.
Our unsecured loans are also typically easier and quicker to arrange than any secured loan. During normal office hours, we aim to respond with a quote for lending the amount your particular business needs within just an hour of your enquiry. A formal response to any application which follows is generally given within 48 hours, and the funds may therefore be available within just days of your initial enquiry.