Unsecured Business Loan

Unsecured Business Loans are one possible source for business cash. You should be sure that the specific need for the money is applicable and that the loan is suitably structured. An Unsecured Business Loan has a variety of advantages over other forms of finance:

• Flexibility. A business loan allows you to preserve your cash and working capital. The unsecured funds can be used for almost any purpose including paying off current debts taken out at higher interest rates or a pending balloon payment.
  
• Retention of Ownership. You retain the current ownership of your company instead of raising funds by selling an interest in your company to an investor. The lender is only entitled to interest on its loan, not a percentage of the profits or a share in the company that an investor would expect.
  
• Cash Flow Management. Unsecured business loans can provide you access to capital with minimal up-front payments and the flexibility to design a loan repayment schedule suitable to your finances.
  
• Budgeting. Business loan unsecured schedules are fixed at outset, which means cash management is more predictable.
  
• Tax Advantage. Interest payments on your loan are tax deductible, whereas purchases financed from profits are made out of taxed income.

You should always consider the disadvantages of any financial action before embarking.

• Additional guarantees. Depending on the credit rating of your company, the lender might require additional guarantees. These may be provided by you, your partners or your bank and could affect your personal credit rating or your standing with your bank.



• Defaults. The lender may define a variety of events that will constitute a default on the loan, including failure to make any payment on time, bankruptcy, insolvency and breaches of any obligations in the loan documents. Try to negotiate advance written notice of any alleged default, with a reasonable amount of time to cure the default.

How Unsecured Business Loans Work
Unsecured Business loans can be structured several different ways. The most important aspects to consider are the interest rate (type and method) and the repayment schedule for the loan. There are two options to set your interest rate:

Variable Interest Rate: With this type of business loan the interest rate applied on the outstanding principal fluctuates in line with changes to a standard rate, commonly the Bank Base Rate (BBR) or the London Inter-Bank Overnight Rate (LIBOR). As a result, the amount of your payments will fluctuate with it. As your business loan carries a risk, you will pay a premium above the agreed standard rate. The interest rate for each period will be the current market rate plus the predetermined premium that remains constant throughout the life of your loan. The advantage of a variable interest rate loan is that you save money when the market rate decreases. The disadvantage is that you are not protected from an increase in the market rate and the interest you pay will increase with the market rate.

Fixed Rate: With a fixed rate business loan the interest rate applied to the outstanding principal remains constant for an agreed period that may be the length of your loan (or in certain circumstances for an introductory period e.g. 1 year of a longer loan). The interest rate is set at the beginning of your loan by examining the risk involved and the current market rates. The advantage of a fixed rate loan is that your interest rate is fixed and the payments constant and they will not rise if the market rate rises allowing for predetermined cash flow management. The disadvantage is that you will not benefit from a decline of the market rate.

When deciding on your repayment schedule you should always remember the longer you take to payback the principal the higher your total interest payment will become:

Regular Payments: This type of loan requires you to pay the same amount each period (monthly or quarterly) for a specified number of periods. Part of each payment goes toward interest and the rest goes toward principal. After the specified number of periods you will have paid back the entire loan plus all interest.

Regular Payment and a Final Balloon Payment: This type of loan requires you to make equal monthly payments of principal and interest for a relatively short period of time. After you make the last installment payment, you must pay the balance in one payment, called a balloon payment. Some lenders will give you the option to refinance the loan to help you stretch out the final balloon payment. This type of loan offers definite benefits to you. Because of the lower monthly payments during the course of the loan, you can keep more cash available for other needs. Of course, when you are thinking about those nice low payments, don't forget the big balloon payment waiting around the corner.

Interest-Only Payments and a Final Balloon Payment: With this type of loan, your regular payments cover only interest. The principal stays the same. At the end of the loan term, you must make a balloon payment to cover the entire principal and any remaining interest. The obvious advantages of this arrangement are the low periodic payments. But over the long term, you will pay more interest because you are borrowing the principal for a longer time.

Single Payment of Principal and Interest: If your lender agrees, you can promise to pay off the loan all at once at a specified date. This payment includes the entire principal amount and the accrued interest. Borrowing money on these terms is best for a short-term loan.

Equal Principal Payments: This type of loan requires you to pay the same amount of principal each period for a specified number of periods. The total payment for each period will be variable (and should decline) as you pay interest only on the outstanding principal at the beginning of the period. Borrowing money on these terms requires larger payments in the beginning of the loan.

Unsecured Business Loan FAQ
What is the usual length of the loan? Unsecured Loans are typically available for any time period between 1 to 15 years.

Why take a loan when I meet my needs with cash? A loan preserves cash and liquidity. You might be able to secure better conditions on your loan when you are not in dire need for cash. A loan can also provide additional funds over cash.

How does my personal credit history affect my chance of getting a business loan? Lenders use your personal credit history to help them decide whether you are a good risk for a loan (especially in the case of sole traders and partnerships). If your history includes late payments or bankruptcies, you should include a letter with your application explaining the circumstances and how they have changed. This can soften the impact of these black marks against you. Always be honest about your credit history - covering up problems is the fastest way to get shown the door.

How can I improve my chances of getting a small business unsecured loan? Be prepared to demonstrate why you have a solid chance of repaying the loan. It will be extremely beneficial to be able to show the lender a history of your earnings and a projection of future earnings. It is also beneficial to show that you have invested in your business, the lender will be more comfortable knowing that your interests are aligned with its.

Who is responsible for the repayment of the loan? The legal structure of your company will determine who is responsible for the repayment of the unsecured loan and who will be liable if it is not repaid. If you are a sole trader, you bear all the responsibility and potential liability. If you have formed a partnership, all of the partners involved are jointly and individually responsible. If you are a legal company, the Directors may be liable if the loan is not repaid.