For many business owners, taking out a business loan can be a necessary option for securing extra funds.
But what do you need to know before you take out a loan and are they a good idea?
The different types of loans
In the UK, there are a wide variety of business loans available, but they are largely divided into two main categories:
· Secured loans where the borrower will put up business assets as security against the loan (or where business assets are insufficient, the directors may have to enter into personal guarantees to act as security for the loan)
· Unsecured loans that do not require assets to be put up as security
Whilst secured loans potentially put your business assets at risk, they allow you to borrow larger amounts of money with lower rates of interest.
Conversely, unsecured loans carry more risk for the lender, meaning interest rates will be higher, so your business will have to repay more.
More specific types of loans include:
· Short-term loans, which can cover emergency expenses, but with a shorter repayment period
· Long-term loans covering an extended repayment period of say 5 to 30 years
· Cash advance borrowing, which allows the business to borrow against future profits, allowing the company to pay a percentage of transactions until the loan is fully paid
· Bad credit loans are specifically for businesses with poor credit who may struggle to borrow, but these come with higher interest rates
· Start-up loans are for new companies and which may be offered or guaranteed by the Government
· Small business loans are targeted at SMEs and are usually unsecured.
How do I know if I’m eligible?
There are many factors that lenders will consider before allowing you to borrow against your business.
This includes your age, credit record, what type of loan you are after, and your business finances.
Most business loans require you to be at least 18 years of age to qualify.
Having a good credit record is not vital, but it will allow you to apply for a wider range of loans with better terms. If a lender does not believe that your business can repay, then you may be denied a loan.
You can increase your business credit record by improving your personal credit score and paying back your loans on time.
What benefits do business loans have?
Getting a business loan can help you to boost your business.
Primarily, a loan will help to improve your business’s cash flow.
This is particularly the case with short-term and emergency loans, which can help you balance your cash flow when expenses get too high.
A loan can also help considerably with the costs of starting your business. Start-up loans can provide a lump sum that will help you cover the expenses of equipment, staff, and commercial space in the early stages before you can turn a profit.
Why should you be cautious of loans?
Business loans have the capability to damage your credit record.
If you miss or make late payments, your credit record will be damaged and getting further loans in the future will be more difficult.
Moreover, if you decide to borrow with a secured loan, you could risk losing your business assets that were put down as security. You must ensure that you make repayments and carefully consider before taking out this type of loan.
Business loans also have stricter eligibility criteria compared to personal loans. You must jump through more loops and potentially agree to worse terms to secure a loan.
If you are looking into applying for a business loan, you should also seek professional advice.
We can not only help identify suitable loans for your business but also help with the application process and ensure that the repayments are manageable and tie in with your business plan.
Call us today to find out how we can help identify cash flow issues and potential solutions.