Why do I need to provide security?
One of the first things to establish when considering business finance is whether you have suitable security to back up the loan you are seeking. You may not want to use a personal asset to back a business loan, or you may not have any suitable assets that lenders are willing to accept. However, without any security on offer you are likely to incur higher overall costs or may not be able to borrow at all.
What types of security will lenders consider?
Security can take many forms, a few examples include property, machinery, stock, vehicles and in the case of invoice finance, your debtors book. Lenders will want to understand if the asset is ‘unencumbered’. In other words, they will want to know if any other organisation has a call/charge on the asset. As a general rule, lenders typically like to advance funds based on somewhere between 50% to 70% of the value of the asset. By offering security, if you fail to keep up repayments, the lender will have legal authority over the asset.
What if I can't offer security?
There are lenders that will provide funding on an unsecured basis. These loans can be quicker to organise as there is no need for legal work in relation to obtaining security over an asset. However, they can be more expensive as the risk to the lender is higher. Your business and personal profile and credit score are important when applying for an unsecured loan so it’s good planning to make sure these are fully optimised before proceeding with an application. You can check your personal credit score on any of the UK credit referencing agencies, such as Callcredit, Equifax or Experian or similar service providers.
For unsecured loans, it is very likely that the lender will ask you to provide a personal guarantee. The term ‘unsecured’ may sound confusing, but it means that no business asset is used or available as security. Instead, you as the business owner you will be personally liable to repay the loan if the business fails to meet repayments. This doesn’t mean all your personal assets are at risk, because you can limit the guarantee. However, it is a good idea to have a plan on how you will meet an outstanding loan if the business fails. One of the options you have is to purchase Personal Guarantee insurance.
Interested in Personal Guarantee Insurance?
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