In our previous post we highlighted the concern that many small business owners and entrepreneurs were unaware of alternative financing solutions (other than traditional high street banks) which are readily available to SMEs. We will now look at the first of two different forms of business loans – secured and unsecured.
Secured business loans generally start from around £25,000 and are secured against property. An increase in property values over recent years has meant that many business owners have attempted to release equity from their property by re-mortgaging their property. Many entrepreneurs have struggled with new regulations to prove affordability, or have been affected by age constraints. Secured business loans are limited by what security is available in order to secure the advance. In some cases a loan can be secured against by taking a legal charge. This is where lenders enforce their rights to a property and is registered at HM Land Registry.
Secured business loans are available for up to 10 years and can be longer in some circumstances. When considering this option for raising finance, it is worthwhile to consider why lenders may not agree to unsecure business loans, the reasons may be:
- Patchy trading history
- Regulatory risks associated with the business
- Past credit issues with directors
- Level of borrowing has exceeded the level where the lender is happy to advance without security
Borrowers may see this financing solution as viable for the following reasons:
- Need to refinance existing borrowing
- Growing business without a proven track record
- Need flexibility around repayment plan
- Unable to borrow due to previous credit issues
- Reluctance to provide some of own cash required by lenders
- Low set up cost
Small business owners and entrepreneurs should always assess any business decision by understanding the level of risk versus the reward to the business. When considering this option a property valuation will be required. Serious consideration should also be given to what the borrowing will actually give the business in terms of cost savings, profits, cash flow or expansion and growth. In our next post we will discuss unsecured loans.