A Guide to Business Loans & Finance

Anyone who has started their own business knows full well that it isn’t a simple or easy task, and the process has a huge number of ups and downs. As the business begins to grow into a powerful and prosperous enterprise, the end goal may well constantly change.Business loans explained

Businesses need funding to be able to start up or pay for any relevant expansions as they grow, and an excellent option for getting the financial assistance that they need is through business loans. A business loan is similar to a personal loan; however, they are designed specifically for business use. A lender will provide the business with a pre-specified amount of funding, to be repaid over an agreed upon duration, usually by fixed monthly payments with interest.

There is a vast range of options when it comes to business loans so you can find one that is right for your businesses requirements. Some business loan providers will offer short-term finance options, while others allow you to borrow large amounts for more extended periods of time. Business loan providers may also be specialised in the types of businesses they will lend to, for example, some will work with start-ups and entrepreneurs while others may focus on small to medium businesses.

When considering a business loan, it is essential to think about the reasons behind getting your business into debt, and if the return will outweigh the cost. Many people automatically see debt as a negative that should be avoided at all costs, however, which it comes to business that is not always the case.

You should be able to understand the difference between good debt and bad debt when deciding to take out a business loan. Good debt will let your business grow, increase profits and generate valuable income. Bad debt is when you make an investment that doesn’t pay off, and results in the businesses value decreasing. Only consider a business loan if you truly believe the investment is worthwhile and the extra cash will increase the net value of your business over time.

Don’t be enticed with business loans because of an attractive deal. Make sure you are always taking out a business loan for the right reasons to fund your business growth.

What can you do with a business loan?

Once you have decided a business loan is required to help your business grow, it is important to determine exactly what the funding will be spent on. Some lenders will want to know what the money is being spent on when they are considering your loan application.

Business loans can be spent on anything as long as it relates to your business. Some businesses will use loans for purchasing stock, moving premises, hiring a new team, or replacing equipment. You can also use a business loan to pay off other existing debts, although this should be carefully considered.

Usually, specific loan agreements will outline any restrictions on what you can and can’t spend the loan on, and it can also depend on the type of business loan you take out. However, the majority of business loans are relatively unrestrictive when it comes to what the money can be used for, as long as it is for your business you should be good to go.

Often people end up with more funding that they need for their plans, and it can be exciting thinking of all the other things the cash could be spent on but think carefully and make sure it is a right business decision that will improve your profits in the long run.

Popular things that businesses will spend their funding on

1. Updating equipment

Over time, equipment will break or become outdated. Investing in new equipment can help to improve the day to day running of your business.

2. Acquisitions

A great way of quickly expanding your business is to acquire a competitor company.

3. Technology

Technology is constantly evolving and usually in a positive way. Chances are there is some new tech out there that could benefit your business by automating processes and saving time.

4. Training

Whether it is for yourself or your team, spending money on education and training is a great way to keep motivation up and increase knowledge in your business area.

5. Commercial property

Maybe your business needs a better location to reach its full potential? Or you want to expand to a new location? Investing in real estate for your business is almost always beneficial, as even if the business fails, you have the property to fall back on.

6. Hiring

Having the right team of people behind you will help your business grow. Maybe you need to reduce your own workload, or you want to bring in an expert to help guide you and your business.

7. Advertising and Marketing

Marketing is an excellent example of needing to spend money to make money, hire an agency or professional freelancer to help get your business name out there.

8. Inventory

If you are running a product-based business, you will need to purchase your stock before you can really start to grow the business.

Lenders will usually ask you what you need a loan for, it is worthwhile doing the sums before applying so you can be clear on what you want to borrow and how the money will be spent. Business finance brokers will talk through your requirements and present a range of suitable finance options.

What types of business loans are available?

There are a lot of different options out there when it comes to business loans and financing products. Choosing the right loan for you and your business is crucial, look at all the different types of business loans available and decide which best suits your business’s needs. Here are some of the most common types of business loans and finance:

Business Loans

If you want to receive a lump sum of cash and regularly repay over a set duration, then a business loan might be the best option for you. These types of loans can be either long-term, which last more than one year, or short-term, where they are repaid in two years or less.

Usually, every monthly payment will be the same set amount, making cash flow and financial planning simple as you can efficiently manage your outgoings. Business loans are available directly from banks or from online lenders, and they are good for long-term growth and expansion plans.

Loan Calculator – how much will it cost?

Use the loan calculator to get an idea of the monthly cost of the loan and how much the repayments will be.

Secured Business Loans

Secured business loans will use business assets, to provide security that you can repay the loan. The assets can vary but will often be the commercial property. Lenders will want to consider the value carefully in terms of how much they are willing to lend.

If you have assets of high worth such as a property owned outright without a mortgage, then a lender will have confidence that they will not lose their money. If you fail to make repayments, then the lender will have legal authority over the assets used for security. Typically, you can borrow up to 70% of the security’s value with a secured loan.

Unsecured Business Loans

If you do not want to risk your assets or do not have assets to use as security, then you may find a lender who offers unsecured business loans. These are quick to secure as your assets do not need to be valued. However, you may not be able to borrow as much as you can with a secured business loan. For a successful unsecured business loan, you will need evidence of a healthy profit margin.

An unsecured loan will usually cost more than a secured loan in the long run, however, is much quicker to process and receive from a wide range of lenders.

Lines of Credit

This type of business loan is open-ended and allows you to withdraw and repay funds on a revolving basis. Lines of credit work on a credit limit basis, which is the maximum amount that can be borrowed at any one time. This is a short-term solution and is great or managing gaps in cash flow, clearing emergency expenses or purchasing inventory. You can get a line of credit from an online lender or a bank.

Commercial Property Loans

Commercial mortgages can be used by businesses to purchase commercial property. They use the property being financed as a guarantee on the loan contract, which results in low-interest rates. Commercial property loans are available from banks and specialist lenders; however, the terms and repayment schedules can vary massively.

Business Credit Cards

These work in the same way as a consumer credit card and are based on personal credit history. Like consumer credit cards, issuers offer rewards and points for charging purchases to a business credit card. They are a great option for start-ups as they do not take your businesses finances into considerations when applying. The downside of this is that your personal credit will be at risk if your business fails and card payments aren’t kept up.

Online Business Loans

There are a lot of online lenders that provide term loans, lines of credit and other small business loans, and these differ to bank loans in a few ways. It is usually easier to qualify for an online loan, and the application process is quicker and easier. The disadvantage is that online business loans often have shorter terms and higher interest rates associated with them. They are an excellent option for those in need of funding quickly, or businesses that struggle to qualify for a traditional bank loan.

Peer-to-Peer Loans

Peer-to-peer loans are funded by individual investors as opposed to an official lender. There is a range of online marketplaces where business owners can find individual lenders that are open to peer-to-peer loans. They work by dividing the loan amount between a large number of investors, which results in lower risk for the lenders and lower interest rates for the borrowers. Peer-to-peer loans can take some time to come through, as all investors must contribute their share before the funds can be released.

Invoice Factoring

Invoice factoring allows businesses to sell unpaid invoices to a specialist factoring company. These factoring companies will usually lend between 75-100% of each outstanding invoice, and these are paid back to the lender when the business’ customer pays the invoice. It is common for customers to pay the factoring company directly; however, you will still have full control over how the customer repays the invoices. Invoice factoring is great for covering gaps in your cash flow from unpaid invoices.

Merchant Cash Advances

A merchant cash advance (MCA) is when an MCA company takes a proportion of a business’s credit and debit card sales as loan repayment. They can take between 5-25% of the daily sales as repayment on a loan. MCAs are a quick funding option as many companies will approve applications and release funds within the same day and qualifying for an MCA is often easier than qualifying for other types of business loans. The downside is that the interest rates are often very high, and so are usually only beneficial for emergency expenses.

Make sure you decide on whether you need long-term or short-term financial help before picking an option, there are positives and negatives for both, but you need to find a loan that will work for your business, not hinder it. A good finance broker can help you assess your needs.

What is the difference between small business loans and large business loans?

Different sized businesses require different financing for them to grow and prosper effectively, and the types of business loans available will depend a lot on the size of business you have.

Small businesses often need additional funding for creating initial cash flow, starting the business and building some capital, which can usually be provided by a small business loan. Because of the new nature of small businesses, applying for finance isn’t always straight-forward, and it can be difficult for them to qualify for a loan. For this reason, there is a wide range of options available for small businesses acquiring the necessary funding.

Small business owners may decide to use a personal unsecured loan, such as home equity, or they may choose to purchase their equipment on a loan basis such as ‘buy now, pay later’.

Large businesses have all the same options available to them as small businesses. However, they also have much more to choose from as a lot more lenders will happily lend to an established company. Large banks and other financial institutions will offer business loans to large businesses, and as they have more assets than a small business, they can use these assets to obtain secured business loans and lines of credit.

Large businesses also have the option to sell some of their assets in times of trouble, and lenders see this is a significant advantage as they know the business will always have a way of making the repayments. Larger companies also benefit from having a long and large business history, which lenders will use to make assumptions about how well the business will do in future.

Always be honest with your potential lenders, they will help you with your business as it stands using sophisticated lending calculations. Lying about your profitability may only worsen your debt and lenders may withdraw their funding.

How to qualify for a business loan?

Different types of loans and different lenders will all have their own specific requirements for being accepted for business finance, but in general, all loans will need you to have a few necessary elements. There a few things you will need to consider and do before applying for a loan, to help your chances of being accepted:

Build your credit scores

You might think that when trying to secure finance for your business, your personal credit scores won’t matter. However, that is not always the case. Be sure to build both your personal credit score and your business credit score before applying for funding. Credit scores are based on five factors: payment history, current debt, length of credit, types of credit used and recent credit inquiries. It is crucial to pay all bills on time and keep a close eye on your personal credit score by checking it online. Your business credit score can also be checked online at three business credit bureaus: Experian, Equifax and Dun & Bradstreet. Many business loan lenders will require you to have an excellent business credit score as well as a good personal credit score to qualify for a loan. Online lenders can be more lenient and will often only look at personal credit scores.

Know your lender’s requirements

All lenders of business finance will have a set of requirements that borrowers should meet, and while some lenders may offer some flexibility on this, it will dramatically improve your chances to you meet or exceed all their requirements. This is where using a broker really helps as they understand the market and the lenders requirements.

Collate your documentation

Banks and other lenders will usually ask to see a range of legal and financial documents during the application process. This could include the following:

• Personal and business income tax returns
• Personal and business bank statements
• A photo of your driver’s license or passport
• Income statement and balance sheet
• Commercial leases
• Business licenses
• Financial projections
• Articles of incorporation.

Collating all this information and documentation can be time-consuming but will significantly improve your chances of being approved if you can provide everything the lender asks from you. Online lenders often won’t ask for as much documentation. A broker will be able to confirm what is required as part of the application process.

Create a business plan

Many lenders will want to be aware of how the business loan will be spent, as well as seeing that you have a future plan to make the loan repayments. Some banks will require a solid business plan that covers what the loan will be spent on and how it will benefit the business.

Business plans should include your current financial situation and projected financials for the future. You should also be able to demonstrate your organisation’s cash flow and how the business expenses and loan repayments will be covered.

Offer collateral

Collateral is an asset that can be seized and sold by the lender if payments are not kept up, and many business lenders will ask for some kind of collateral for small business loans. Collateral could be in the form of real estate, equipment or inventory, and it provides the lender with some security that they can recover their money if payments aren’t made.

Where to start looking for a business loan?

Before you start the search for a business loan that suits you and your business, make sure you know how much you want to borrow, how long you will need to pay it back, how quickly you need the money and if you are prepared to offer some security. It is also beneficial to have an idea of the type of business loan you want to take out.

There is a vast range of business lenders and banks out there that offer loans to businesses, and each will have different application processes, eligibility criteria and interest rates to consider. You can expect slightly different services from each type of business lender:

High-street banks

Banks no longer lend to businesses as freely as the used to, which makes a lot of companies unsuitable for a bank loan. Major high street banks do offer business loans, and you can go into local branches to discuss your options with their business advisors. They will often want to see a strong balance sheet and long trading history, and the application process can be lengthy.

Independent lenders

Some large independent lenders are great alternatives to bank loans as they don’t have the same restrictions and are more prepared to lend to a wide range of businesses. Some independent lenders will focus on one particular product while others offer a full range of business finance options. Independent lenders often have a much faster application process and more flexible criteria; however, their rates are usually much higher than a traditional bank. Independent lenders can be found online, and while there is a lot to choose from, there are also comparison sites out there that will compare a range of lenders for you. Most independent lenders will also have a heap of online reviews that you can check before you commit to anything.

Brokers

A business loan broker can act as an agent between businesses looking for funding and lenders looking to invest. Usually, brokers have very little to do with the financing itself, but they simply put the two parties in touch with each other.

Brokers will review your business circumstances and loan requirements, and contact lenders on your behalf to find the best loan deal that suits your needs. The downside of using a broker is that you will often have to pay broker fees, which is either a flat fee or commission based. Alternatively, the broker may seek payment from the loan provider.

What are the interest rates on business loans?

Like with any loan, business loan interest rates can either be variable or fixed rate. Variable interest rates will fluctuate, whereas a fixed rate will remain the same throughout the loan duration. The interest rates offered will entirely depend on the lender and the terms of the loan. For example, a small business loan from a high street bank may provide a representative APR of 10%; however, a peer-to-peer loan could offer a rate of just 3%.

Most lenders will have a business loan calculator on their website so you can work out exactly what the interest rate and repayments will be for your specific loan requirements.

Calculate interest payments

What fees are there for business loans?

Some business loans may also require you to pay fees in addition to interest rates, and much like the interest rates, these will vary depending on the lender and type of loan. These are a few of the kind of charges you may come across when taking out a business loan:

1. Origination fees
These fees are charged by brokers and lenders and cover the cost of processing paperwork for the approval process. Often the cost of these fees will be a percentage of the total loan amount.

2. Underwriting fees
Underwriting is the process of assessing a borrower’s eligibility for a loan. When taking out a loan, a thorough underwriting process will take place, and underwriting fees may be charged for this, depending on the lender.

3. Bounce fees
These are unsuccessful payment fees that incur if your bank account has insufficient funds when the repayment is taken. Bounce fees are often flat rates and not based on percentages.

5. Prepayment fees
Some lenders may charge a fee for paying the remaining balance of your loan early, and it is usually a proportion of the remaining interest or a flat fee.

What are the repayment terms?

Repayment terms are the terms that are agreed with the business loan lender at the time of taking out the loan. They relate to the duration of the loan, the minimum payments required and penalties for late payments. These repayment terms and completely dependent on the lender and type of loan chosen, but it is essential to fully understand the repayment terms of any loan before taking it out.

Benefits of business loans

Business loans of any kind have plenty of benefits to growing your business and building on your investment, whether you are a small start-up or a large corporation, a business loan can assist your business in reaching its full potential. Here are some of the main benefits of taking out a business loan:

Protecting personal assets

A significant advantage of taking out a business loan for your company as opposed to a personal loan is that all of your personal assets will be protected should the business fail. Often, if a business is liquidated the loan will be paid back during the liquidation process as opposed to by the business owner. It means that only the corporation can be made bankrupt and not the individuals.

An abundance of options

With the vast amount of business loans out there, borrowers have a large number of loan options to choose from, making it really easy to find a loan that is right for you and your business. You can select from short-term loans, long-term loans, a line of credit and much more so you can find the right loan to help your business grow.

Convenient

As business loans can be found from either high street banks or online services, finding and applying for a loan could not be more convenient. Repayment options are also very convenient now, as many lenders will work to fit them around your business and its cash flow.

Affordable

Business loan rates are often not overly expensive, and if you shop around you can usually find some very reasonable rates. These rates will also depend on the financial situation of your business and its credentials, so if your business is in good shape, the cost of a business loan should be minimal.

Grow and sustain your business

The ability to access additional funding from a business loan, as and when your business needs it, will help your business to grow and operate effectively. It is true that you need to spend money to make money, and a business loan provides you with the extra cash to boost your business.

Negatives of business loans

Business loans, like everything, also have their downsides as well as their positives, and it is essential to weigh up both sides when considering taking out business finances. Here are some of the main disadvantages of business loans:

Lengthy applications

Many lenders will require you to complete a long application process, where they need to verify a considerable amount of paperwork and external factors before deciding if you are eligible for a business loan. Often, at the end of this lengthy process, the answer may be no, and you will be right back to square one.

Collateral

Most business loans require some kind of collateral, especially for small businesses or start-ups. Lenders often won’t take long to repossess collateral, even if as much as one payment is missed. If you choose to use collateral such as property, this could end up affecting your personal finances.

Not all businesses qualify

Business loans of all types come with a strict set of rules and conditions, and many companies won’t meet the necessary criteria to be accepted. You may waste a lot of time completing an application process, only to find out you had no chance of being accepted.

Top tips

1. Always know how much you need and for how long before you start the application process. Lenders will favour businesses who have a clear plan and have put thought into their finances.

2. Be ready to answer every question honestly. Lying may disqualify you for a loan, you may also end up in debt as a result. Don’t be optimistic, be realistic.

3. Build up your credit score both for your business and personal account. Make sure to fix any errors as soon as possible.

4. Keep documents orderly, up to date and professional. It can prove to lenders that you can afford to repay debt.

5. Talk about projects rather than a long-term vision, it will help lenders understand your realistic future, not the one you strive for.

6. Use accounting software to make projections and budgeting easier for you and your lender.

7. Consider all lending options from peer-to-peer to crowdfunding, you may find a better finance option that fits with your business needs.

8. Keep your business plan and accounts up to date at all times.

9. Be friendly, lenders will often assess your character when determining your application.

10. Make sure you understand the lending process entirely before accepting a loan, ask a financial advisor for help if you have any concerns.