Unsecured business finance

There is a record number of 5.5 million small and medium sized enterprises (SMEs) in the UK, says the Federation of Small Businesses (FSB) – and the number has been growing steading, with more than 2 million additional SMEs since the year 2000.

The types of small and medium sized businesses are extremely varied – accounting for at least 99% of all private sector businesses in practically every industry, including professional practices.

Borrowing by SMEs

If there is one thing that all of these businesses share in common, however, it is their need to borrow funds on either a regular, continuous or occasional basis.

Borrowing supports the need to branch out in capturing new markets, expanding or enhancing the assets available to the business – especially in the constantly growing area of IT systems and support – and, generally, to smooth the peaks and troughs of cashflow problems through injections of additional working capital.

Loans – secured

Conventionally, many businesses turn to secured loans as their primary source for such necessary funding.

By offering security – by way of assets owned by the business or through those owned by its partners or directors – relatively large injections of capital may be achieved, at potentially favourable rates of interest (thanks to the degree of confidence given to the lender through the security which is offered).

Any assets offered as security, however, remain at risk throughout the term of the loan and may be repossessed by the lender if the business defaults on repayments of the loan – by no means an unprecedented event, if the business itself faces a period of financial difficulty or even on the verge of collapse.

Moreover, secured loans typically attract relatively lengthy repayment periods, during which you need to pay interest on the outstanding balance of the loan. Over the years, therefore, the loan may be costing a substantial sum in interest – which may also be subject to variation, in line with changes in the Bank of England base rate (which is currently forecast to see an increase in mid-2018).

Unsecured business finance

Whilst there may be a place for secured borrowing – especially if your business has a relatively poor credit rating and the security then offers a degree of confidence to any lender – unsecured business finance may prove the appropriate choice for those professional practices, with an established reputation and a healthy credit rating.

Free of the need to offer any form of security, none of your business assets – or the personal assets of partners or directors – are put at risk.

Unsecured loans are typically arranged over a much shorter repayment period – of between 6 months and five years – so also avoiding many years during which interest payments continue to accumulate. The commitment to repaying such a relatively short-term loan, which generally attracts a fixed rate of interest, also makes the everyday management of your practice cashflow that much easier and straight forward.

Having decided how much you need to borrow, over whatever repayment period, the loan may be applied to meet your precise business needs. Examples might include – but are certainly not limited to:

  • the acquisition – through purchase or lease – of assets needed by the business to keep pace with events in a fast-moving world or those needed to seize opportunities presented by emerging new markets;
  • the upgrading or enhancement of IT hardware and software – systems which are increasingly essential to ensure an appropriate level of service to your clients;
  • help in the acquisition of rival practices and businesses – in an environment in which many professional practices are subject to mergers and acquisitions;
  • funding for the professional indemnity insurance premiums which may be an ongoing condition for your partners to continue in practice;
  • a convenient method for spreading throughout the year the general taxation and VAT liabilities which may fall to your practice – with the possibility for adopting rolling loans to continue the ability to manage such tax liabilities with minimum disruption to the cashflow of your business; or
  • to top up the working capital available to your business – of whatever amount is sufficient for meeting contingencies to be met by your business.

Compared to the time it may take to arrange a secured loan – with the drafting of legal documents giving effect to the security offered – a fixed rate unsecured loan is also likely to be arranged far more speedily and smoothly.

In many cases, the lender is able to give you a quote for the requested funds, borrowed over your chosen repayment period, and present a formal offer within a matter of just days – ensuring the speedy transfer of funds directly to your business account when they are most needed.