Using Unsecured Loans to Start a Business

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Starting a business venture is as exciting as it is challenging and from the outset, there are many factors for you to consider. However, perhaps the most important and the leading factor is the funding required to get the business off the ground in the first place. There are a number of different ways in which you can look to acquire funding, ranging from online payday loans, to asking friends and family, to securing a short-term business loan.

However, in recent years it’s become much more difficult to acquire short term business funding. This is where payday and other short term loan options come in, as these may be methods of securing the money you need to get your business up and running. Let’s explore the different options available to you for getting help starting your new business.

Short term loans for businesses

There are a range of short-term loans, which when used correctly and responsibly, could help a business take off. For example, a business may be in an early stage of its life and requires a few hundred pounds. Banks and other traditional lenders are very unlikely to lend what they would deem a very small amount to the business.

However, online direct lenders and short-term loan companies are often more open to providing the necessary loans, should you meet their eligibility criteria and lending requirements.

Payday Loans

Payday loans can be used effectively to help a business in various cases. For example, a small business owner may require £1,000 to buy some new, popular stock which can be sold at a large profit. A quick payday loan taken out over a month or so, can provide the funding to purchase the products in the short term. Then, once the business has sold the products, and by the end of the month (or repayment period), they pay off the loan capital plus interest and the rest is left over as profit for the business.

Wondering about payday loans and guarantors? Well, payday loans are unsecured, no-guarantor loans, meaning you are solely responsible for the loan you take out. And, unlike logbook loans, they do not require you to use something of your own as collateral.

Instalment Loans

Instalment loans from a direct lender are another popular short term loan option for many. As opposed to traditional payday loans which will typically be repaid in 1-3 months, Instalment loans can be spread out over a longer period, to make the repayments more manageable and affordable. In the case of a business, it may be the case that a similar amount of money to a payday loan is needed, but the business only has very limited cash-flow.

In such a case, the business may borrow a similar amount as they would with a payday loan, simply spreading out repayments over 1-6 months. Each month the business will repay a portion of the loan and the interest and so long as they keep up with their repayment schedule, by the end of the repayment term the debt will be cleared.

Guarantor Loans

Guarantor loans are a way of securing slightly more than you would by way of a payday or instalment loan. As a guarantor loan is ‘semi-secured,’ with a guarantor required for the borrower, to guarantee the repayment of the loan, lenders will often lend a bit more.

However, it is important to remember that should you default on a guarantor loan, not only will it affect your credit score, but it will fall upon your guarantor who may be a friend or family member to fulfil the repayments and your obligations. For more on this topic, head over to our guide covering the topic of Do you need a guarantor?

How can business funding be used?

This will depend on your business and what you need to get it off the ground initially. For example, if the business is a retail business selling physical products, money will be needed to purchase the products in the first place in order to sell them. Also, premises, insurances, and other initial overheads will need to be covered. In the case of a ‘traditional’ retail business on a high street, this may include:

  • Rent of the premises

  • Business Rates

  • Day to day bills (electricity, water, and Council Tax)

  • Security systems (such as CCTV)

  • Any wages of staff

Or in the case of a business selling a service rather than a physical product (usually in an online business), much of the initial funding is likely to be spent on set up and marketing. This will likely include investment in the required website as well as its marketing (be that through social media, email, pay-per-click or search engine optimisation marketing.)

Ultimately, initial funding will be needed to get a business going so that it can start generating profit and paying off associated business debts as soon as possible.

Are there other ways to fund a new business venture?

Opting for business loans in the short term is one way to get your venture quickly off the ground. However, there are other ways in which you can generate money if you currently have little savings.

For instance, you could think about renting out a spare room to generate extra funds, or why not sell any unwanted items to boost your savings? Also, sticking to a solid budget can hugely help in the long run.

While it may take you longer, your money will eventually build up, and before you know it, you’ll be able to put these extra funds towards your business. For more insights on this topic, why not check out our guide: how much can I save in a year? In it you’ll find top saving tips as well as effective monthly budgeting tips!

There are various options when it comes to funding a new business venture, including payday loans, guarantor loans, instalment loans and other avenues, but which should you choose? Well, you’ll want to go with the option you’re comfortable with and eligible for.

So, take your time to carefully consider all of your options. And before you make a decision, check out our guide on what to consider before taking out a loan.

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