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 business loan.

However, in recent years, and particularly since the Financial Crash in 2007-08, banks and ‘traditional’ lenders are much more apprehensive to lend significant money to fledgling businesses as they used to. This is not to say they do not lend, but it is much more difficult to acquire funding in this way.

However, with the emergence of regulations since 2014 in the short term loans market, payday and other short term finance options may be a short term method of securing the money you need to get your business up and running. Considering what is out there as well as how some of the most commonly used loan options work, could help you in making your decision whether or not to apply for a loan for your business in one way or another.

Short Term Loans for Businesses

There are a range of short term loans, which 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 of short term loans 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.

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 one 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.

How Can Business Funding be Used?

Depending on what the business in question is, the money initially acquired to get it off the ground will vary in its intended purposes. 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 thereafter. 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

In the case of a purely online business, for example, in the case of a business selling a service rather than a physical product, 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.

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