You may be in the early stages of creating a new business or have been trading for a number of years and have made the decision to expand. Either way, you may require finance to support your business. One of the most popular ways of borrowing funds for business purposes is with a business loan so let’s have a look at this type of borrowing in a little more detail.
What is a business loan?
Quite simply, it enables your business to raise money on which you would be charged interest and being able to repay the borrowing over a period of time.
Who can arrange a business loan?
A business loan can be taken out by a sole trader, partnership or limited company.
What can a business loan be used for?
A business loan can be used for so many purposes. Some examples include the purchase of stock, plant, machinery, towards buying or refurbishing business premises, working capital, marketing costs, setting up a website or consolidating an overdraft.
Who provides business loans?
They are available from a variety of lenders. These include the high street banks and building societies and a number of other financial organisations such as peer-to-peer lenders.
Because there are so many sources of business loans you may wish to consider using a specialist business loans broker who has access to an extensive panel of lenders providing you with the opportunity to get the best deal in the market place.
How much can you borrow?
Business loans tend to be available for amounts ranging from £1,000 to £25,000.
How long can you borrow the money for?
Normally, you can borrow the funds over a term of between 1 to 10 years. This provides you with the flexibility to agree a monthly repayment figure that the business finds affordable. The term is sometimes linked to the “life span” of the asset being purchased.
Is security required for a business loan?
Some business loans are available on either an unsecured or secured basis. Each application is assessed on an individual basis.
If security is required by the lender this could be the likes of a mortgage over the business premises, a second mortgage over your home, a personal guarantee by the director(s) or a mortgage debenture. The interest rate on an unsecured business loan will be higher than a secured business loan in view of the increased risk.
What types of interest rate are available?
You often have the option of either a fixed rate of interest or a variable rate of interest linked to the Bank of England base rate. The former gives you peace of mind that you know your repayments will remain the same throughout the term of the loan even if the base rate increases. The later may prove attractive if interest rates fall during the term of the business loan.
Is a deposit required?
Not always but, on occasions, you may be required to make some contribution towards the cost of what is being purchased. Each case is looked at individually.
How do you pay the business loan back?
Normally, you would make monthly repayments to cover the repayment of capital and interest but, sometimes, it may be possible to arrange an interest only business loan whereby you just cover the interest on a monthly basis and repay the capital at the end of the term of the business loan. Monthly repayments would usually be transferred from your business current account to reduce your indebtedness.
Is a repayment holiday available?
Some lenders will consider a 6-month repayment holiday at the start of the loan to assist with cash flow. Obviously, interest will continue to accrue from when the loan was put in place and will be reflected in future repayments.
Can you repay the business loan early?
Some lenders offer the option to be able to pay back the loan before the end of the term without any penalty.
What documentation will the lender require?
This will vary depending upon whether you are a new business start-up, an established business and whether you are already have a “track record” with the financial institution you are applying to.
For instance, you may be asked to provide audited accounts i.e. balance sheet and profit and loss account (projected if you are a newly established business) plus a cash flow forecast, management accounts and several months bank statements.
Are any fees payable?
There may be an arrangement fee payable to the lender for setting up the business loan and legal/valuation fees if security is required. A fee may also be payable to a broker if they have assisted you in arranging the business loan.
We hope that the above Business Loans Buyer’s Guide has proved informative and we look forward to assisting you in finding the most suitable business loan to meet your requirements.