Business Loans Explained

Oct 23, 2014   //   by Keith McDonald   //   Business Guides, Lending Guide  //  Comments Off on Business Loans Explained

A business will often need to borrow money at some point, either to survive or to invest for the future. A business loan is one way for a firm to access the finance it needs. Let’s find out more about the options available.

A business will often need to borrow money at some point, either to survive or to invest for the future. A business loan is one way for a firm to access the finance it needs. Let’s find out more about the options available.

Business loans typically range between £1,000 and £50,000, though much larger amounts are available as well. Firms can use this funding for a variety of reasons: from improving cash-flow in the short term to investing in capital, personnel, or research and development in the longer term, which will help a business to expand.

What are the options?

The options will depend on the status and reputation of the business. Banks have remained risk-averse following the financial crisis, so it can still be challenging.

For start-up companies, the opportunities will be more limited, because there will be no accounts or any track record of profitability. But, there are start-up loans available, along with mentoring and support, from the government’s new Business Bank.

You can also re-mortgage your home to free up capital for your business.

In the early stages, firms will have to accept they will be charged a higher rate of interest by any lender that is prepared to lend to them. But once a company has a few years’ trading history, the options begin to open up. For example, small firms may be considered for credit card receivables financing (or credit card factoring). This is where a lender will accept a firm’s future credit card takings as an asset against which it can borrow money.

Only when a firm is established with some signs of profitability is a lender likely to advance funding on an unsecured basis. Otherwise, a property will frequently be used as collateral against any loan. If you fail to make repayments, the building can be repossessed by the lender.

What is required?

A quality application is all-important in securing a business loan. A lender will expect to see a detailed business plan which presents a breakdown of how the loan will be used. There will also be scrupulous checks of the borrowers’ commercial credit history so a lender can judge its exposure to risk.

Applicants will almost certainly need a set of recent company accounts when they apply to demonstrate their credibility to the lender. If they struggle to make any headway, it’s worth consulting their credit report to diagnose what the issue is, and perhaps to see if there are any alternative finance options that are suitable.

Security and risk:

A lender will normally demand that property is held as security against a business loan. This reassures a lender that they will be able to recover the loan if the business defaults.

For more information on the risks associated with business loans, make sure to seek advice from the lender on the potential consequences in the event of a default.

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