The last few years have been difficult for many businesses, and with recent news that 2023 is on track to see the highest numbers of companies going bust since 2009, it’s not surprising many businesses are looking for ways in which to stop themselves joining that sad statistic. One of the most common options is to take out a business loan. This could be to buy new equipment, hire new staff or even to help with cash flow issues.
But borrowing money should never be an easy decision, as it will always have to be paid back, and with interest to boot. We take a look at all the ins and out of business loans to help you decide whether applying for one is the right choice for your business.
What is a business loan?
A business loan is simply a lender providing a company with money for an agreed amount of time, which is then paid back with interest. Business loans can be short-term or long-term and secured or unsecured.
Secured business loan: an asset, such as property, stocks or shares is offered up as security against the amount borrowed. This asset acts as a form of guarantee and reduces the risk to lenders, which allows them to offer better repayment terms.
Unsecured business loan: allows you to borrow without using any business assets as security. Interest rates tend to be higher, and you might be asked to provide a personal guarantee you’ll pay back the loan yourself it the business can’t.
Things to consider if you want to secure a business loan
- Work out why you need a business loan: if you have a clear idea how you will use the money, lenders are much more likely to approve your application. Common reasons for taking out a business loan include buying equipment or stock, expanding a business such as moving location or hiring staff, consolidating debts into one easy monthly payment and funding marketing activity. This year, 69% of SMEs have said the reason they needed external finance was ‘cash flow related’.
- Determine the loan amount: once you know what you need the money for, you can work out how much to borrow. This should be enough to cover your needs, but not so much that you are fully reliant on the loan. You also need to check you can afford the monthly repayments.
- Check your credit score: your credit score will give lenders a good idea of whether you can be trusted to repay your loan on time. It’s worth checking your credit report is in order before you apply for a loan, as otherwise your application could be rejected. MoneySuperMarket allows you to check your credit score for free.
- Prepare a business plan: lenders are much more likely to see your business as a credible candidate for a loan if you can provide them with a comprehensive business plan. It should include your business’s history, goals, opportunities for growth, current market trends, and long-term financial projections. Also include how you plan to afford the loan and when you are going to start repayments.
- Decide on the type of business loan: secured business loans tend to offer lower interest rates, longer terms as well as larger loans making them ideal if you need capital to grow your business. As the loan is secured against one or more of your assets, lenders are more likely to approve them.
If you don’t have enough assets to use as collateral or would rather not provide security, then an unsecured loan is a good option. As there are no assets to evaluate, the application process tends to be easier, and you’ll get your loan quicker. - Find the right lender: compare different lenders, such as traditional banks, challenger banks, online lenders, peer-to-peer platforms and Community Development Finance Institutions. Look at factors such as interest rates, repayment terms, fees, and their eligibility criteria to make sure you can meet them. Choose one that is the best fit and offers you the most flexibility along with decent interest rates.
Paying back a business loan
Having a plan in place for how and when you are going to pay back your business loan is imperative. Loans are legally binding and the last thing you want to do is default on your repayments as this can have a long-term impact on the health of your business. Ensure you know:
- the start date for repaying the loan
- repayment due dates
- whether there are early repayment fees
- penalties for overdue payment
- whether your interest rate is fixed or variable, as this will have an impact on how much you pay each month.
Also make sure you create a new business plan which includes repaying the loan. This will help you understand how repayments will impact on your business, which is especially important if you experience seasonal peaks and troughs and will allow you to take mitigating action.
Taking out a business loan isn’t a decision which should be taken lightly, so if you aren’t convinced it’s right for your business or if you’re unsure about any aspect of the process, please get in touch and we’ll be happy to discuss all the options with you.
