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Why would you use a business loan?
A business loan is simply a form of financing intended for business purposes. In exchange for the funding you will have to pay interest on the loan. However, you retain ownership and control of your business, unlike taking on investors.
A loan can help with many common business needs, such as expansion, buying equipment or hiring new staff. Start-up loans and small business loans, in particular, can help businesses that have good prospects but limited funds.
How does a small business loan work?
When considering how to get a business loan, you have several choices to make.
An unsecured business loan does not require you to provide any security. These loans are typically smaller than secured loans and may have a higher interest rate as the lender bears more risk. On the upside, approval can be quicker than for a secured loan.
Secured loans need assets of the business or a personal guarantee from a director of the business as security on the loan. If the loan is not repaid, the lender can seize the assets or sue the guarantor. Loans for larger amounts (often £100,000 or higher) usually require security.
The loan term defines how long you have to repay the loan. Six months is usually the shortest term lenders will offer.
Unsecured business loan terms are usually short, often less than five years. Secured business loan terms typically last five to ten years. Remember, the longer the term, the more interest you will end up paying.
Start-up loans are usually for small amounts, typically £500 to £25,000. Lenders will want to see your business plan and, if you have begun trading, your financial statements. Be aware that many start-up loans will be secured loans or require a personal guarantee. Always check with your lender.
Small business loans may be secured or, if your business has been operating for several years, unsecured. These loans usually range from £1,000 to £100,000, although secured loans may allow higher borrowing.
Some of the most common loan options are government-backed loans, peer-to-peer lending schemes and bank loans for business.
What are the costs of business loans?
Lenders will quote an annual interest rate (annual percentage rate or APR) when you apply for a loan. You must pay back this amount in addition to the amount borrowed (the principal) of your business loan and any applicable fees. For example: £5,000 at 10 per cent APR over a five-year term (60 months) is a monthly repayment of £105.18 per month. The total amount that must be repaid is £6,310.80.
In general, a business loan will usually have a higher interest rate than a personal loan. If you need a relatively small amount for a short time, a personal loan may be a quicker and less expensive option.
An established business with a good credit history will be offered a lower interest rate than a new business with less of a record. A short-term business loan will likely have a higher rate. A longer term may give a lower interest rate but cost more in total. An unsecured loan will probably have a higher rate than a secured loan.
Check with your lender about any other fees, such as arrangement fees or early repayment fees.
If you do not make payments on time, it will damage both your business and personal credit. It could also lead to legal action and, if a secured loan, you may lose your security.
How long does it take to secure business loans?
Loans can be approved within 48 hours in many cases and it is rare that a response would take more than a week. To speed up the process and increase your chances of approval, provide as much information as possible about the financial state of your business. This includes bank statements, a profit and loss statement and your business plan.
What type of security do I need for business loans?
Lenders will require security for large loans, or if your business is not established or has a poor credit history. Security may be personally held, such as bonds, shares or your home, or it may be held by the business, such as work vehicles, buildings or land. The security offered will need to be evaluated, and you will pay the cost of the valuation.
Businesses with insufficient security to meet lender requirements may qualify for assistance via the British Business Bank’s Enterprise Finance Guarantee programme. This guarantees up to 75 per cent of a loan’s value for qualifying businesses. In addition to loan payments, an additional fee, currently charged at two per cent per year, must be paid as a premium for participation in the programme.
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