A business loan is a designated amount of money lent to a company for specific business purposes. The borrower repays the principal sum along with interest over a predefined period. Business loans can support various aspects, from purchasing inventory before a busy season to acquiring new equipment or machinery for growth and operational needs.
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Understanding Business Loans
Similar to personal loans, to acquire a business loan, an application must be submitted to a lender who evaluates your business's eligibility and determines the interest rate. Upon accepting the offer, your business receives the funds and begins repaying them monthly, along with interest, over the agreed period.
Eligibility hinges on several factors, including your business's trading history, assets, cash flow, and credit history.
Some Common Types of Business Loans
- Revolving Credit Facilities: A flexible financing option where a business can withdraw, repay, and redraw funds within an agreed limit, much like a credit card. Ideal for managing cash flow and unexpected expenses.
- Overdrafts: A facility allowing businesses to draw more money than they have in their account up to an agreed limit, providing a safety net for short-term financial needs or unexpected costs.
- Merchant Cash Advances: Provides immediate funds based on future credit card sales. Suitable for businesses with a high volume of card transactions, offering repayment through a percentage of daily card sales.
- Asset Refinancing: Involves using the equity in a company's assets (like machinery or vehicles) as security for a loan. It's a way to unlock cash tied up in assets, often used for expansion or improving cash flow.
Businesses can potentially borrow between £50,000 and £10 million, with repayment terms stretching from one month to 15 years. A business loan calculator can help estimate the cost of the loan based on the amount, interest rate, and term length.
Types of Business Loans
The business finance market offers a wide range of options. While banks were traditionally the primary source of business loans, today’s market includes various specialist and alternative finance lenders.
Is a Business Loan Suitable for You?
Consider a business loan if your business needs a cash boost for equipment purchase, expansion, or managing cash flow dips. Loans can strengthen your business position and help achieve goals.
Timeframe for Obtaining a Business Loan
The process to secure a business loan can range from a few hours to several weeks, depending on the loan type and lender. Secured loans generally require more time to process than unsecured loans.
Secured Small Business Loans
These loans necessitate collateral, such as property or equipment. The collateral reduces the lender's risk, often resulting in lower interest rates and favourable terms. Benefits include less emphasis on credit scores, fixed interest rates, potential for early repayment, and generally lower costs compared to unsecured loans.
Unsecured Small Business Loans
These loans do not require collateral and are suitable for rapidly growing or asset-light businesses. Benefits include quicker processing, access to capital for growth, and coverage for unforeseen expenses, though they typically require a personal guarantee.
Advantages and Disadvantages of Business Loans
Pros include access to capital for growth, retaining full control over your business, flexibility in fund usage, and fixed repayment rates. Cons comprise strict eligibility criteria, potentially higher interest rates for newer businesses, partial loan approvals, and negative credit impacts for defaults.
Alternatives to Business Loans
Alternatives include merchant cash advances, asset finance, invoice financing, and revolving credit facilities. Each option caters to different business needs and circumstances.
Obtaining a Business Loan with Poor Credit
While a bad credit rating might lead to higher interest rates or rejection, it doesn't entirely preclude you from obtaining a loan. Certain products cater to businesses with less-than-ideal credit histories.
Enhancing Loan Approval Chances
Improving your chances involves checking your credit report, organising finances, ensuring up-to-date business accounts, and creating a detailed plan for the loan's use.
Applying for a Business Loan
Fundably can assist UK SMEs in securing business loans. Our platform matches businesses with appropriate lenders and products from a wide pool of lenders, offering a range of financial solutions, including unsecured loans and merchant cash advances.