If you’re a business owner, there are two types of loans you can apply for: secured and unsecured. Which one you opt for will depend on both your business and your personal circumstances, as some people may have difficulty being approved for one or both of these types of finance. You may find our guide on secured vs unsecured loans useful.
A secured loan is where your lender has the ability to seize collateral in the event you fail to stick to the repayment terms of the agreement. An example of this might be a construction company putting up its equipment as collateral, also known as asset finance. If they default on their loan, the bank will take ownership of that equipment to recuperate its losses.
There are a number of things you can put up as collateral on your loan. These include property, vehicles and even stock. If you’re able to put collateral down, then there are some obvious advantages to be had. For a start, as lenders see these loans as less risky, you’ll get a much better rate on your finance than you would on an unsecured loan.
The issue for some business owners is they don’t have anything substantial to put up as collateral. This could be because they’ve just starting out and haven’t yet had chance to build up their company, so in many cases it’s understandable. However, with many lenders unwilling to offer loans without collateral, it can be difficult to get finance if you’re in this position.
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As you’ve probably guessed, an unsecured loan is a type of finance that isn’t backed by any collateral. This can be advantageous for obvious reason as it’ll mean you don’t need to put up anything in order to get the cash. Instead, the lender will base your suitability on a combination of your personal credit history, and your business’ cash flow.
While these types of loans can be great for owners of start-ups who would be refused for secured loans, what if your credit history is bad? If you’ve got a low credit score or, Heaven forbid, a dreaded CCJ, then you’ll find it practically impossible to get approved for an unsecured business loan. So, what should you do if you find yourself in this position?
Merchant cash advance
For those with poor credit and nothing to put up as collateral, it can feel like your options have all but evaporated, however, there is an alternative and a possible solution to your problem: a merchant cash advance.
An MCA is similar to a loan in that the lender will offer a cash sum for you to pay back under a set of agreed terms, although the repayment structure of a merchant cash advance differs to that of a traditional business loan.
Unlike a regular business loan where you’ll have to make fixed payments of the same amount every month, with a merchant cash advance your payments are based on your takings instead. With an MCA, you’ll pay an agreed percentage of your credit/debit card sales, meaning you have more flexibility because the repayments will reflect your business’ performance. In difficult times this can relieve some of the pressure on your business because if you’re experiencing a bad month then naturally your repayments will be lower.
As your suitability is based on your taking, you don’t necessarily need great credit to be approved for this type of finance. Another benefit with a merchant cash advance is it provides access to a sum of cash without the need to put up any collateral. So, if you’re struggling to get a secured loan because you don’t have the necessary collateral, then an MCA could be the ideal solution.
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