Business Loans – The Consumer Guide

Business Loans – The Consumer Guide

  07 Jan 2020

If you are in need of funds in order to scale or grow your business, a business loan may offer the solution you require. Furthermore, a business start up loan is also available for the ones planning to initiate their business. If you need money due to any reason, a business loan would be the best idea.

What is a Business Loan?

A business loan refers to the kind of borrowing that is specially designed for commercial organisations and industries instead of an individual. With a business loan, you can:

  • Borrow from £1,000 to £3 million
  • Repay (pay the loan back) over a period ranging from 1 month to 15 years

Although business loans are of several different types, they all fall into one of these two categories:

  1. Secured: You can borrow money for your business using security, i.e., collateral. In case you fail to pay the loan later, the lender has the right to sell the security in order to get their money back.
  2. Unsecured: When you borrow these loans for your business, you will not have to risk any of your business assets to provide them as collateral.

Do Business Loans need to be Regulated?

Lenders require to be regulated only if they offer loans to limited companies. This means that certain lenders who only lend money to sole traders are likely to be unregulated.

What are Business Loans used for?

You, as the owner of the business, can use the borrowed money for any purpose that is related to the business, like:

  • Expanding operations
  • Buying new equipment
  • Paying off debts
  • Moving premises
  • Taking on new staff
  • Purchasing stock

Can your Business get a Loan?

Generally, most of the businesses can get a loan of some kind. However, your options may be bound by the kind of business you are involved in. Therefore, you must check for the eligibility of a loan before applying for it.

For instance, government business start up loan may be limited to people who have new businesses whereas many cash advance loans need you to have been trading for a certain time period before you apply.

Also, there is no set limit to how many loans you can take as an owner. However, you will always have to demonstrate that your business can afford the kind of loan you are applying for.

Kinds of Business Loans

Depending on your sector of business, there are various kinds of business loans available. Nevertheless, the major kinds that are available to most of the ventures include:

 

  1. Government Business Start Up Loans: A government-backed initiative specifically for start-ups, this loan offers a variety of loans and grants to new businesses that have low interest rates.

In case you are beginning a new business, you can borrow a maximum of £25,000 and repay it over a period ranging from 1 year to 5 years with the use of a business start up loan.

 

  1. Cash Advance: You can borrow money against your credit card sales or future debt through a cash advance loan.

This kind of loan does not usually quote an interest rate since the amount you repay depends on your card takings. Rather, there will be:

  • Set fees at the beginning of the loan, and
  • An everyday charge until the money is paid.
  1. Working Capital: This loan is designed in such a manner as to help you pay the day-to-day expenses of your business, like paying wages instead of long-term investments.

Similar to bank loans, most working capital loans require a personal guarantee from the company directors.

  1.   Invoice Finance: This type of loan works a little differently as compared to the usual cash loan. Instead of lending a lump sum in cash, the lender purchases outstanding invoices from your business for a fee. This loan is of two categories:
  2.   Invoice discounting: Lenders release the funds prior to your payment of invoices and you then owe them the remaining balance.
  3.   Factoring: The lender supervises and manages all your sales and collects the money directly from the customers.

You can receive invoice financing from independent companies that specialise in invoice finance, buildings societies, and banks.

  1. Asset-Backed: This secured loan is backed by a business asset. One can borrow more with this kind of loan as compared to many others available out there in the market.

The assets that can be used to secure a loan include:

  •     Land
  •     Property
  •     Stock
  •     Machinery
  1. Short Term: This kind of loan is lent usually for a few months. However, you can potentially borrow it for a few days.

These loans generally charge higher interest rates as compared to other business loans.

Some lenders of such loans charge monthly interest instead of an annual rate. Therefore, double check in order to find how much will it cost before you apply.

 

  1.   Peer to Peer: A kind of social lending that is offered by online lending platforms, peer to peer refers to a loan where you can borrow money from investors who are looking for a return on their money.

 

  1.   Credit Facility: This kind of loan permits you to borrow money as and when your venture requires it. You only have to pay interest on the amount you withdraw and can pay it back when you have enough funds.

 

  1.   Bank Loans: These loans are in cash that is offered by building societies and banks. You can borrow a lump sum and repay it over a set period. Most of the banks need a directors’ guarantee. This means that in case your business is unable to repay the loan, the directors will personally be liable for the debt.

Conclusion

As a business owner who needs funding to grow the business or as a beginner who needs a business start up loan, both the ways, a business loan is the best option due to its advantageous nature and simple process. Due to a range of types of business loans, you have an option to choose the one that is the most suitable for you.