Which Type Of Loan Is Best For Your Small Business?

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Many small businesses, regardless of their industry, will call upon financial assistance to help them get started, grow or develop their resources.

According to data released by the British Business Bank, 2018 saw 40% of SMEs seek funding to boost their cashflow needs, while another 33% did so in order to purchase fixed assets. Another 9% – up from 5% in 2017 – applied for finance to aid their expansion.

With so many SMEs out there, all with different requirements, there simply cannot be a one-size-fits-all approach to business loans. So, what are some of the types out there and for which enterprises are they most appropriate?

Secured loans

Secured business loans are those which are secured against the valuable assets owned by the company. So, if your business was unable to repay the debt, the lender would be entitled to sell those items in order to regain their money.

Secured loans are most suitable for those businesses which are established and have a range of assets to offer up as security – for example property, equipment, vehicles or machinery. They can often be cheaper, as there is less risk for the lender when compared to an unsecured loan.

Unsecured loans

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As the name suggests, unsecured loans are those which are taken out without offering any assets as security in return. Some lenders may require a personal guarantee, which would mean you are personally responsible if your business fails to repay. These can be quicker than secured loans, because there is no need for any valuations of property and the legal process is more straightforward.

Unsecured loans can be most fitting for smaller businesses that haven’t built up a vast collection of assets, or companies that offer intangible services, such as IT or consultancy. The up-front cost of unsecured finance is usually lower than that of a secured loan, but the overall cost tends to be larger because there is an increased amount of risk on the part of the lender.

Business cash advances

This type of loan is slightly different in that it can come in varying forms and is borrowed on the basis of being repaid in line with future earnings. With a business cash advance, there is no loan term or interest rate but instead, your repayments are agreed as a proportion of your future sales.

Business cash advances can prove extremely useful to companies whose takings are seasonal – for example, hotels, bars and restaurants, which may experience some boom months followed by a quieter period. But, because business cash advances are only repaid as a percentage of their sales, companies will only ever pay back what they can afford and will never be hit by hefty interest or late repayment fees.

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Poppy loves personal finance almost as much as she loves her two cats, Tif and Taz.
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