Question 1

What is a business loan?

Accepted Answer

A traditional business loan is a lump sum of capital that you pay back with regular repayments at (usually) a fixed interest rate. Lenders include high-street banks, challenger banks, online lenders and small local specialists. There are many different types of loan but the two overall categories are secured loans and unsecured loans.

The loan amount is typically up to 25% of your annual turnover or £10,000 – £50m.

Business loan is a broad category, and can refer to lots of different products including:

There is a huge range of lenders offering loans to businesses, and they all have different eligibility criteria, application processes and interest rates.

It’s often possible – though more challenging – to get a business loan if you have a poor credit rating. You may need to offer security or a personal guarantee.

It’s worth noting that if you take out a short-term loan you’ll pay higher interest, but you may pay more interest overall with long-term financing, because you’re borrowing for a longer period of time.

Question 2

Why choose a business loan?

Accepted Answer

Within these different types of business loan – of course there is some overlap between them – you’ll find some that better suit your particular situation, e.g. you might be looking for start-up finance, equipment finance or working capital finance.

Depending on how long you think you’d take to repay the loan you can consider:

short-term business loans – usually between 3 and 18 months (often referred to as working capital loans)
‘term’ loans – usually between two and five years (‘term’ means medium- or long-term)
very short-term loans – including revolving credit facilities and other business overdraft alternatives
long-term loans – these can run from 3 to 30 years, require monthly or quarterly payments from cash flow or profit, might restrict other financial commitments (e.g. debts, dividends or principals’ salaries), and can require an amount of profit set aside for loan repayment
balloon loans – relatively small monthly payments, ending with final ‘balloon’ payment to pay off the remaining loan balance

Question 3

Pros and cons of a business loan

Accepted Answer

You can respond to opportunities or threats to your business quickly with a business loan Grab that opportunity to grow your business; if you don’t have cash today to meet that opportunity, a business loan may be the option for you. Furthermore, a cash flow hiccup may not derail your business if you don’t have the business finance options in place. Repayments can impact cash flow- it is critical that the right loan amount with the right interest is considered as over leveraging your business may prove exceptionally damaging to your business outlook. Therefore, before taking out a loan, the repayment timetable and committed funds should be considered carefully. Low credit score can make a loan expensive – your credit worthiness determines how affordable a loan is. If your business has no assets to use as collateral, your credit is low, you may find that the same loan could be much more expensive than one offered to a more reputable business.

Question 4

Is it suitable for an SME?

Accepted Answer

You can raise capital without losing equity in your business. If you want to borrow without selling equity, a business loan may be the choice for you.

You can capitalise on a business opportunity; capture that critical market segment or launch the marketing drive you are certain will propel your business to next stage. Or an unforeseen cash flow problem may not prove fatal to your business. Often when lines of credit are exhausted, raw materials and supply demands need to be met without the business folding, a business loan may be the first or last resort.

Question 5

Have you also considered?

Accepted Answer

secured loans unsecured loans start-up loans working capital loans revolving credit facilities line of credit (non-revolving) business cash advances asset-based lending asset finance (i.e. equipment finance)