A complete guide to business loans

By Joe Francis Updated 28th Oct 2019

When you’re launching, running or buying a company, business loans can be a cost-efficient way to access finance. With so many products available, however, it’s important to understand which type of business loans are right for you.

What is a business loan?

A business loan enables your company to access finance according to set terms. A simple example is borrowing £5,000 from a bank to fund new business equipment and making monthly repayments.

However, business loans are far more complex than that. There are various different types of loans and endless variables which can change the amount you borrow, the length of the repayment terms and the interest rate you pay.

Furthermore, some business loans are aimed at particular companies or enterprises. Startup business loans are typically restricted to up and coming businesses or very new organisations, for example. Similarly, small business loans may be aimed at companies that do not exceed a maximum turnover limit.

Although there are business loans to suit every type of company or organisation, you will need to find loans that are suited to your enterprise.

What are the different types of business loans?

There are numerous different business loans and each type of financing option has different implications for your firm. To learn more about the different types of finance available, take a look at our rundown of different types of business loans now…

Secured Business Loans

A secured loan is a form of asset-based lending. Here, your company offers some or all of its assets as collateral for a loan. If your business owns expensive equipment, vast amounts of stock or commercial premises, for example, you could obtain a secured loan against these assets.

Typically, you will agree on a fixed or variable interest rate with the loan provider and make monthly repayments until the loan is paid off in full.

Whilst secured loans are often easier to obtain and can offer lower interest rates, they do carry some risk. If you’re unable to meet your monthly repayments, for example, the loan provider will have the right to seize the assets the loan is secured against.

Unsecured Business Loans

If your company doesn’t have valuable assets or you don’t want to use them as collateral, you may prefer to take out an unsecured business loan. The company’s reputation, credit score and financial history will play a significant role in determining whether you’re a viable candidate for an unsecured loan. As the loan provider won’t have collateral in the terms of assets, there may be stricter application criteria, along with higher interest rates.

Again, unsecured loans can generally be taken out with a fixed or variable interest rate, with repayments being made on a monthly basis.

Short-Term Business Loans

A short-term business loan may have a repayment period of just a few days, weeks or months. This could benefit companies who are facing cash flow issues or who require a bridging loan until alternative investments are received.

Short-term business loans can provide a quick remedy and a fast repayment strategy means you won’t be tied in for a long period of time.

Long-Term Business Loans

Long-term loans can run for many years and are often used when businesses want to borrow a large amount of capital. Long-term business loans generally offer lower interest rates than their short-term counterparts. Whilst you will typically pay more interest overall because of the length of the loan, a lower interest rate can mean you pay less every month. This helps to keep your repayments to a manageable amount.

Fixed-Rate Business Loans

A fixed-rate loan simply means that the interest you will pay is fixed at the start of the loan and won’t be changed. This allows you to calculate how much you need to repay down to the last penny and ensures you can budget your business accounts accordingly. Whilst fixed-rate loans provide certainty, if the base rate drops, it may mean you’re paying over the odds.

Variable-Rate Business Loans

With a variable-rate business loan, your monthly repayments and interest rate will fluctuate. Typically, the interest rate you will pay will be in line with the Bank of England base rate. Whilst variable rates can offer lower interest rates than fixed-rate loans, there is always the risk that variable rates will rise considerably.

Working Capital Loans

If your business is unable to operate due to funding issues or is experiencing cash flow problems, a working capital loan may be beneficial. These are designed to help facilitate the on-going operation of the company and can be offered on various different terms, e.g. short-term, fixed-rate working capital loans.

Invoice Financing

Although invoice financing isn’t technically a loan, it is a popular form of business finance. If your company has unpaid invoices, you can sell these to a third-party company. Although you can only usually ‘sell’ an invoice for a percentage of what it’s worth, it does enable you to access the funds quickly and minimises the amount of time you need to spend on chasing unpaid invoices.

Alternative Business Loans

Although short-term, long-term, fixed-rate, variable-rate, secured and unsecured loans are common forms of business finance, there are alternative options available. Crowdfunding and P2P lending have proved to be a popular way of finding business finance, for example. This allows you to set your own terms and gives people the opportunity to invest in your business or lend to your company on pre-agreed terms.

In addition to this, non-commercial loan providers may offer industry-specific loans to companies within their sector. Development institutions often make financing available in the form of startup business loans, for example, as this encourages people to launch businesses within the industry. Although these can be harder to come by than commercial loans, they typically have fairly low interest rates.

How do business loans work?

Business loans enable companies to access funds for a variety of purposes. If you are launching a business, expanding your company, buying new equipment or taking over another firm, for example, you may need to access funds to do this. Business loans provide a reliable way of accessing a large amount of funds upfront and can facilitate efficient business growth.

Loan providers offer to lend this money upfront, on the basis that they will be paid back over a set amount of time. By charging interest on the loan, the provider makes a profit once the loan is paid back.

How to get a business loan?

To obtain a business loan, you’ll need to go through an application process with your chosen provider. They will want to know how much you want to borrow, over what length of time and what the loan is for. In addition to this, lenders will typically want to see your business accounts and financial information.

Many loan providers accept loans directly, so you could make an application in person, online or over the phone. In some cases, you may need to contact a business loan broker in order to make an application.

Before you start applying for business loans, however, it’s important to determine which type of loan is right for your company. Whilst there are various different types of loans available, they may all be right for your business.

Larger firms who want to borrow a lot of money may benefit from the low-interest rates offered by a secured, long-term loan, for example. Similarly, companies with considerable finances may be comfortable taking the risk associated with variable interest rates.

For smaller businesses, however, their asset base may not be valuable enough to obtain a secured loan. In such cases, a dedicated, unsecured small business loan might be more appropriate. When SMEs have limited capital, they may also prefer to mitigate their risk by opting for a fixed-rate loan.

If you’re unsure which type of business loan is right for your company, it’s vital that you seek independent financial advice. By obtaining specialist help and comparing the loans available, you will be able to determine which type of business financing is most cost-effective for your company.

FAQs

Yes. Any company can, theoretically, get a business loan. However, you will need to ensure you satisfy the lending criteria of specific providers in order to be approved.

Yes. Even if you haven’t been trading for very long, it is possible to obtain a business loan. In fact, startup business loans, enterprise loans and small business loans are designed for newer companies and smaller organisations.

This will depend on the exact terms of your loan. Whilst some providers do accept early repayments, they may apply charges if you want to pay your loan off more quickly than the set term. However, there are loan providers who offer business loans with no early repayment fees. If you think you may want to repay a business loan earlier than the set term, it’s important to consider this before you make any applications.

Although you’ll need to supply a range of information and documentation when you apply, obtaining a business loan is easier than you think. With immediate decision-making and efficient transfer times, you can make an application and have access to your funds within days or even hours!