If you’re planning to grow your business by acquiring new equipment or premises, or to invest in recruiting as well as marketing strategies, you could be thinking about getting a business loan. In order to help you determine if you should consider a business loan as the right choice for you, let us review the different types of loans, how you’ll be required to apply for one, and what alternatives are available and also answer several common questions on business loans.
What is a Business Loan?
The business loan can be described as a method of credit for commercial enterprises as opposed to individuals. Certain types of loans are better for new businesses, while others might be appropriate for companies with some amount of years of filing accounts. The amount borrowed in installments of monthly payments over a specified amount of time, with the addition of interest. Most often the business loans range from amounts ranging from about PS1,000 to thousands of pounds.
Are Business Loans Secured?
Business loans are secured or unsecure. Secured loans are those that are tied to an asset like property, vehicles or stocks. That means that when you’re unable to pay the lender could use your assets as collateral to make the payment. Since there’s less risk for the lender, Secured loans are typically for larger amounts and the interest rates are generally less. Unsecured loans do not require any asset to be secured, therefore they tend to be smaller amounts and have more interest. Unsecured loans are suitable for small-sized businesses that don’t have huge assets. Some lenders may require an individual guarantee by a company’s chief executive for an unsecured loan.
What Types of Business Loan Are There?
The most popular types of business loans comprise:
Bank Loan
Through a business loan from a bank You’ll take out a predetermined amount of money from a bank or a building society over a set duration, and pay interest.
Government-backed Start Up Loan
This is a non-secure personal loan that is backed by the federal government to begin or expand your company. For this kind of loan you have to reside in the UK and be over 18 years old and own (or are planning to start) your business from the UK and have it in full operation in less than 24 months. Start Up Loans have a fixed rate of interest of 6%. They are available for amounts ranging from PS500 up to PS25,000. you are able to repay this loan within a time that ranges from one to five years.
Short-term Business Loan
The short-term business loans are targeted at businesses that want to borrow for just a short period of time, not years, and don’t wish to be bound by long payments. They may be spread for a period of months or weeks. They do have higher interest rates than other loans. Therefore, be sure to know what they are.
Peer-to-peer Business Loan
Through a peer-to-peer loan (or P2P) the borrower will take cash from private investment investors instead of the bank. The loan will typically be matched to these investors via online platforms. There may be fees to obtain the loan, so be sure to pay attentively to charges, fees and interest rates before signing.
Cash Advance
The cash advance loan for businesses (also called a Merchant cash advances) lets you get money to cover your company’s future debit or credit card sales. The amount you pay back each month will be determined by a pre-negotiated percentage of the sales you make with your cards which means you’ll pay more when your company is doing well, and less when it’s not.
Invoice finance
This is the time when a lender utilizes your unpaid invoices as collateral to loan to you. There are two types of invoice financing: invoice factoring is in a position to borrow a portion of the amount of your invoices. The lender will take payment directly to your customer. After that, they pay its expenses and you’ll be paid the remainder. Discounting invoices – this lets you credit against the value of your invoices. However, you’ll get money from your clients and pay the agreed amount.
How Do You Decide Which Type of Business Loan To Apply For?
If you’re thinking of getting a business credit and deciding what type to request You’ll have to consider:
How Much Money You Want to Borrow?
Which loans are appropriate for the type of business you operate – certain loans, such as Start Up Loans are only appropriate for businesses that are just starting out and cash advance business loans are ideal for businesses that make an amount of money through card transactions the amount you are able to repay each month considering your interest rates into consideration the amount of time you’d prefer to get the loan the amount of time you’d like to take it out for. Although it can be tempting to spread the loan for an extended period of time, you could pay more in interest
Applying for A Business Loan
Before you can apply for a loan for business, you’ll have to be certain about:
- Amount you’d prefer be able to
- What do you want to borrow the money for?
- How much can you afford to pay each month
- How long it will take you to pay back the loan.
Similar to other kinds of loans, your company’s credit score will be inspected for favorable loan terms typically being available for those who have high credit scores.
A few ways to boost your company’s credit score include:
- Verifying your credit score and resolving any mistakes
- Invoicing on time
- If you’re a company limited by shares and you file complete, not abbreviated, accounts for the company’s house
- Make sure you have enough money in your bank account to cover any payments you plan to make
- Applying for credit only only when you really need it. Applying for credit in a large number of instances indicates that you are in financial trouble. It is possible to request an estimate instead.
- Maintain all your data including your address for business, current. Inform suppliers, as well as the house of your company, of any changes
- Avoiding court judgments from county courts (ccj) since they are included as credit reports.
You could also be required to submit the accounts of your business and bank statements, as well as details of loss and profits as well as tax returns, the business plan along with proof of address as well as the IDs of directors of your company.
After you have collected your documents and settled which type of business loan that’s best for your needs, you are able to look around and then apply.
Comparing Business Loans
When looking at loans, crucial elements to consider are:
- If you’re suitable to get the loan you’re contemplating. Always verify the lender’s requirements carefully prior to applying
- The interest rates for the loan, and if they’re variable or fixed. It’s important to remember that Representative APR implies that either rate or less that is offered to at the very least 51% of the applicants, therefore 49 percent of applicants are likely to receive a better rate.
- If the loan provider you choose to work with provides a payment holiday (a few months of not paying). However, off from making payments can mean that it will take longer to repay the loan, and you’ll be paying more interest over time.
- if there’s an early repayment fee on the loan.