Whether you are considering expanding your business with new premises or equipment or investing in recruitment or marketing, you may be considering taking out a business loan.
To help you decide if a business loan is the right financing option for you, here we take a look at what they are, what you’ll need to apply for one and the alternatives, as well as answers to some common questions about commercial loans. .
What is a business loan?
A business loan is a form of borrowing for commercial businesses rather than individuals. Some may be more suitable for start-up businesses while others are only suitable for businesses with a certain number of years of deposited accounts.
You will usually repay the amount you borrow in monthly installments over an agreed period of time, plus interest. Typically, business loans are for amounts ranging from around Â£1,000 to potentially millions.
Are business loans secured?
Business loans can be secured or unsecured. A secured loan is one that is tied to an asset, such as property, vehicles, or stocks. This means that if you can’t make payments, the lender can take your asset to pay the loan.
As there is less risk for the lender, secured loans are usually for higher amounts and the interest rates are usually lower.
Unsecured Loans do not require an asset as collateral, so they tend to be for smaller sums and at higher interest rates. Unsecured loans may be more suitable for small businesses without significant assets.
Some lenders require a personal guarantee from a business owner for an unsecured loan.
What types of business loans are there?
Some of the more common types of business loans include:
With a bank business loan, you will borrow a fixed amount of money from a bank or building society over an agreed period of time, with interest.
Government-backed start-up loan
This is a government backed unsecured personal loan to start or expand your business. To apply for this type of loan, you must live in the UK, be over 18 and have (or plan to start) a UK-based business that has been in business for less than 24 months.
Start-up loans have a fixed interest rate of 6%, are for amounts ranging from Â£500 to Â£25,000 and you can repay the loan over a period of one to five years.
Short term business loan
Short-term business loans are for business organizations that want to borrow for months, rather than years, and don’t want to be tied down by long repayments. They can be over a period of weeks or months. However, they tend to charge higher interest rates than other loans, so make sure you know them.
Peer-to-peer business loan
With a peer-to-peer (or P2P) loan, you will be borrowing money from private investors rather than a bank. You will usually be connected with these investors through an online platform. You may have to pay a fee to arrange the loan, so pay close attention to fees, charges and interest rates before committing.
A business loan with cash advance (also known as a merchant cash advance) allows you to borrow money against future sales of your business by credit or debit card. The amount you repay monthly will be based on a pre-agreed percentage of your card sales, so you’ll pay more when your business is doing well and less when it’s not.
This is when a lender uses your unpaid bills as collateral to lend you. There are two main types of invoice financing:
- invoice factoring â you will be able to borrow a percentage of the value of your invoices and the lender will collect the payment directly from your customers. The lender will then take their costs and you will be paid the remaining balance.
- invoice discount â this allows you to borrow against the value of your invoices, but you will collect money from your customers and then pay the agreed fee.
How do you decide what type of business loan to apply for?
When considering taking out a business loan and deciding on the type of application, you will need to think about:
- how much money do you want to borrow
- which loans are right for your type of business – some loans such as start-up loans are only suitable for new businesses, while cash advance business loans are only suitable for businesses that generate a certain amount of income through card payments
- how much you can afford to repay each month, taking into account the interest rate
- the length of time you wish to take out the loan. Although it may be tempting to take out a loan for a longer period, you may end up paying more interest.
- compare fees and charges with each loan you are considering.
It’s important to compare your options and shop around before committing to an option or lender, looking at overall borrowing costs.
What do I need to apply for a business loan?
Before applying for a business loan, you need to be clear about:
- the amount you want to borrow
- why are you borrowing money
- how much you can afford to repay each month
- how long you will need to repay the loan.
As with other types of loans, your company’s credit rating is likely to be checked, with more competitive loan terms usually being offered to people with good credit ratings.
Here are some ways to improve your business credit rating:
- check your credit report and dispute any errors
- pay bills on time
- if you are a limited liability company, file full, rather than abbreviated, accounts with Companies House
- make sure you have enough money in your account to cover scheduled payments
- only ask for credit when you need it. Asking a lot suggests that you are having financial difficulties. You can request a quote instead
- keep all your information, such as your business address, up to date. Notify suppliers, as well as Companies House, of any changes
- Avoid County Court Judgments (CCJs) as these are recorded on your credit report.
You may also be asked for copies of your business accounts, bank statements, profit and loss details, tax returns, a business plan and proof of address and identity of the directors of the business.
Once you’ve gathered your documentation and decided on the type of business loan that’s right for you, you can shop around and then apply.
What should I consider when comparing business loans?
When comparing loans, some important things to check are:
- whether you qualify for the loan you are considering. Always check the lender’s requirements carefully before applying.
- what are the loan interest rates and whether they are fixed or variable. It should be remembered that the representative APR means that the rate, or less, is offered to at least 51% of applicants, so 49% of applicants are likely to be offered a higher rate.
- if your loan provider offers a repayment holiday (a few months of repayment). However, if you take a break in payment, it will take you longer to repay the loan overall and you will pay more interest in the long run.
- if there are any prepayment charges on the loan.
What are the alternatives to taking out a business loan?
If you think a business loan is not for you, there are other options, including:
- Business Credit Cards â if you are looking to borrow smaller amounts, a business credit card may be suitable. You can benefit from an interest-free period on your purchases. However, always pay your balance monthly to avoid incurring interest charges or fees, and check what the card’s annual fees and interest rates are after any 0% period.
- Crowdfunding – this allows you to increase investment, often by pitching your business idea online, in return for rewards for the investors you attract. You could sell part of your business by crowdfunding or offer a reward such as free products or tickets via reward crowdfunding.
- Discoveries â your business account may have an overdraft that is either interest-free or with a low APR. However, this is generally only suitable for small amounts and you will need to check the terms of your overdraft and stick to them.
Frequently Asked Questions
What happens if I miss a payment on a business loan or can’t repay it?
If you miss a payment, you will need to make up the missing amount as soon as possible. You will likely have to pay additional late fees and interest, as well as administration fees, depending on the terms of your loan. If you have taken out a secured loan, your assets may be seized if you are unable to fully repay the loan.
Failure to repay your loan can affect your credit score and the likelihood that you will be able to secure business financing in the future. The time frame for default will be detailed in your loan agreement, so read it carefully. If you can’t repay your loan, the lender can take legal action to recover it.
Do I need to have a business account to take out business credit?
This will depend on the type of loan you choose and who you want to borrow money from. If you are borrowing from your bank it may be easier as they will know your business history but always shop around to make sure it is a competitive way to borrow.
Can I take out a business loan if I have bad credit?
You may be able to take out some business loans with a bad credit score, but you’ll likely be offered higher interest rates and more checks on your business. You may be more likely to be approved for a secured loan than an unsecured loan.
How long will it take to get a business loan?
The length of your loan will depend on a number of factors such as the type of loan you are applying for, the documentation you can provide, the amount you are borrowing and whether you are applying for a secured or unsecured loan. to lend.
With a secured loan, for example, you will need to allow time for your assets to be appraised.