Secured vs. Unsecured Short-term Funding

By Juliette Peyraud, Senior Account Manager at Spotcap

Short-term business loans are an important part of the funding mix. Many businesses use them to grow or pursue certain opportunities, such as hiring staff, renovating premises, bridging a cash flow gap or purchasing new inventory or equipment.

Banks, but also non-traditional lenders offer short-term loans. However,  with lots of different loan types available, it can be difficult for businesses to decide which one would be the right fit for their needs. In order to narrow down the options, businesses could start the process by asking themselves whether they are looking for secured or unsecured funding.

Secured business loan

When taking out a secured loan, business owners provide an asset as a form of security. This could be machinery, vehicles or a commercial property. The amount borrowed is secured against the asset, meaning that the lender can take the asset should the business be unable to keep up with the loan repayments.

Secured business loans normally involve asset valuations, charges on the company’s assets as well as costs associated with drafting such agreements. This means that setting up a secured loan can take several weeks or even months.

Popular  secured loan types include:

  • An asset-backed finance facility, which is provided by a bank or a non-bank lender. Here, the business pays a regular charge for the use of an asset, i.e. machinery, over an agreed period of time. That way, the business avoids the cost of buying the asset outright.
  • Invoice finance or factoring, an 80-90% advance of what an invoice is worth provided by a lender to the business, essentially ensuring that the company is paid sooner.

Unsecured business loan

If a business prefers not to provide any asset as a security, an unsecured loan can be an option. Many unsecured lenders will still ask for a personal guarantee which is provided by the business owner or director. Should the business be unable to keep up with the loan repayments, she, or he, will be held responsible. In most cases, lenders expect the guarantor to have a good personal net worth and to be a UK homeowner.

Different lenders have different loan approval criteria for unsecured loans, but successful applicants all tend to have the following in common:

  • Growth: increasing revenue trends
  • Profitability: strong net profit margin
  • Serviceability: repayment capacity from available cash flow
  • Creditworthiness: high credit scores for both the business and the business director

Another unsecured option is a merchant cash advance. This loan type is particularly suitable for retail and ecommerce businesses with a regular volume of card transactions. With a merchant cash advance, a business borrows a certain amount of cash in exchange for a slice of the business’ future sales. Loan repayments are then taken as a proportion of card transactions.

Short-term loans can help your business grow and pursue new opportunities. If you think your business could benefit from secured or unsecured financing, get in touch with your Breslins representative to start the conversation.