business-loan

Understanding business loans

A business loan typically covers a specified period, usually a number of years, and the amount borrowed is repaid with interest set at a specific rate. Usually, the sum is repaid at monthly intervals, with a fixed payment every month.

Varying amounts can be borrowed and repaid over different periods of time. A smaller business loan may be paid back to the lender within 12 months, or a larger amount may be repaid within several years. Some providers may specialise in specific areas, like lending to start-ups or providing small business loans.

Who is eligible to apply for a business loan?

Any business that meets the criteria set by a particular lender can apply for a loan, but some may have stricter lending rules than others. For instance, some may only consider a limited company rather than a sole trader.

Lending criteria has, in general, become much tougher in recent years, which means you may find it harder to access finance. You may need to have been trading for a certain period, or must be able to provide filed accounts before being considered. Other lenders will be happy to consider a business that has been trading for a relatively short period.

Why apply for a business loan?

There are many reasons to apply for business finance, including expansion, purchasing equipment or premises, or to provide working capital. However, some loans may have higher interest rates – those serving as working capital, for instance, as they have a higher rate of risk.

Benefits of a business loan

Loans may be short term or long term, depending on your requirements. A loan may be beneficial if you are having cashflow problems, as it provides an injection of cash. A business loan may also provide the extra finance you require to be able to expand and buy larger premises. When you start your company, you may find that you need some cash to tide you over the initial months, when you may need to purchase stock or equipment. A business loan may be the difference between success and failure, and can be useful if you are going through a rough patch.

Who can you borrow from?

You can borrow finance from anyone, including family and friends. If you only need a small amount of money, you may be able to borrow from a friend at a lower rate of interest than a bank, particularly if you are just starting your venture. You can also consider peer-to-peer lending, which may have a lower rate of interest than cash offered by a bank.

For more advice on business loans, contact our team of experts today.