Business Loans

What is a business loan?

As the name suggests, a business loan is a type of loan tailored to an individual business and is designed to either help aspiring entrepreneurs set up their business venture or assist small companies in growing their organisation. With a business loan, you can often borrow between £1,000 and £3 million (although, because of the unsecured nature of this type of loan, the average lending amount is typically £25,000 for small enterprises) and pay the loan back over a period of time.

Types of business loans

There are three main types of business loan available for you to consider. However, the right one for you and your business will depend on your individual needs and financial position.

• Secured business loans: A secured business loan is an amount of money that can be secured against a number of different things that include assets in the business, security over what’s being bought or even your home. This means that, should your business fail to keep up with its repayments, your home could be at risk of being taken. However, due to the security the lender has attached to this loan type, secured loans typically allow businesses to borrow larger amounts of money than other varieties of loans
• Unsecured business loans – In contrast, an unsecured business loan is when a building society, bank or peer-to-peer lender will lend a sum of money to a particular business – the amount and interest rate of which will depend on the creditworthiness of the business. As a result, the lender doesn’t take your business or home as security and would therefore find it difficult to repossess them should you fail to make your repayments. However, because of this, the limit for the amount you’re able to borrow is significantly smaller – usually up to around £25,000 – as larger loans require some form of security
• Start-up loans – If your business is just starting out, then looking into the possibility of getting a government-backed start-up loan to see if you are eligible for any type of grant or loan is a viable first step. Working side-by-side with organisations such as the Prince’s Trust, the government-backed Start Up Loans programme helps entrepreneurs develop their ideas into business cases. Loans are unsecured with a fixed rate of interest and are low cost, however must be repaid within five years of receiving them

Advantages of a business loan

A business loan can be a brilliant option for providing security and financial certainty to new and growing businesses for the years ahead. Given that most of these types of loans come with a fixed interest rate, you can be sure that you’ll be paying back the same amount each month – allowing you to plan and budget for your business accordingly.

Not only does a business loan result in long-term financial security, but this type of credit option means that you can keep tighter control over your business goals and day-to-day operations. You won’t rely on investors for help and, as such, you’ll have the final say when it comes to deciding the direction of your business. 

Another advantage of taking out a business loan is that some providers will offer you a payment holiday, allowing you to take a break from paying back your loan during a period of time where you may be waiting on a payment from a client or be experiencing a temporary cash-flow problem. However, it’s important to be mindful that, if you choose to take a payment holiday, not only will it take longer for you to pay back your loan in full, but lenders are likely to charge additional interest on the borrowed amount going forward.

Disadvantages of a business loan 

As true with any type of borrowing, taking out a business loan comes with certain disadvantages that have the potential to negatively impact both your business and your own personal financial situation. As a result, it’s important to be aware of such disadvantages in advance to avoid nasty surprises once you’ve already committed to a loan agreement.

When deciding to take out a loan from a bank or alternative mainstream provider, your loan will be subject to you agreeing to its unique terms and conditions, which might include regularly supplying your provider with updates on your business, as well as engaging in particular financial checks. In addition to this, if you come into a situation whereby you’re able to repay the loan early, you may fall subject to an early repayment change. Therefore, it’s crucial that you consider this before signing on the dotted line and think about the realistic length of time you can commit to borrowing. 

Alternatives

After consulting the above, if you’ve decided that a business loan isn’t the right option for you and your new venture, then there are plenty of alternatives you can consider:

• Cash-flow finance – Depending on your business’s circumstances, you may be eligible for cash-flow finance, allowing businesses to release money tied up in invoices and therefore advancing themselves the money. This involves being lent a value of the invoice in advance, for example 90% of the sum, with the rest being unlocked (minus the lending fees) once the invoice has been paid by the customer. There are a number of fees attached, including administration fees and monthly service charges, and while some banks offer this, many others don’t
• Investment – Another common way to finance your new venture is to raise money through investment. This involves selling parts of your business to an investor, either in assets or shares of your company, and means that you share the attached risks of running a business with another person. Not only do you enter this together, but opting for an investment means that you don’t have to pay interest rates or fear not being able to pay your investor back
• Business credit cards – Getting a business credit card is a brilliant option when looking to access smaller sums of money as most types of business credit cards offer an interest-free period on purchases, allowing you to better manage your cash flow as a result. However, these cards typically charge an annual fee and getting one is dependant on your credit rating
• Crowdfunding – Crowdfunding pages allow anyone, both individuals and professionals, to invest in your business and usually involves giving away shares or assets of your business to said investors. Under EU regulations, the maximum a small or medium enterprise can raise through this method is £3.7million

Want to get savvy with your money? Take a look at our Jolly Good Loans blog, which is full of financial advice and helpful money saving hints and tips. If you’re facing a time of financial difficulty, there is always help available. Head over to the Citizens Advice website, or alternatively, call the free national debt helpline on 0808 808 4000.