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Business loans allow you to borrow money from a lender and pay it back over a period of time. But unlike a personal loan, the purpose must be for your business or commercial needs.
A business loan could be an option if you’re a start-up or if you’ve been trading for a while as an existing business.
You apply for an amount and set the repayment duration with the lender. Depending on the type of loan, the term could be anything from a month up to 30 years. The longer the term, the more interest you’re likely to pay.
You might need a business loan to:
Purchase office equipment
Pay the rent on your business’s property
Pay the salaries of your employees
Purchase stock or supplies
Market your business
You can borrow more money at a lower interest rate with a business loan. But it can take longer to get the money because the application process is more complicated. The process differs depending on the lender, but usually they look at both your personal credit score and the credit score of your business.
Unsecured business loans allow you to access a sum of money for your business without using its valuable assets as security. You arrange the term and repayment schedule with the lender which includes the interest rate of the loan.
Secured business loans also provide an upfront lump sum with an arranged payment schedule. However, unlike unsecured business loans, you need to give details of assets like company shares or property to the lender as security. Secured business loans can be helpful for borrowing larger amounts as they tend to have lower interest rates. It's important to remember though, that if you fail to repay the loan, the lender can take any assets that the loan was secured against.
Startup business loans are for new businesses. They allow entrepreneurs and new business owners to apply for a loan to kick start their business. They often have strict eligibility requirements and your business cannot be more than three years old.
Peer-to-peer lending lets you borrow money from private investors or groups instead of a bank. They are typically available through online lending platforms only and may require you to pay a fee.
Asset finance is a type of loan that lets you fund the purchase of equipment or machinery. The lender purchases the goods and you lease it from them, repaying a set amount back and avoiding a large upfront cost. But when the interest's added it can mean you pay more than buying the asset outright.
With different loans available for different purposes (and costs), the right type depends on your business and what you need the loan for.
If you’re a new business or a budding entrepreneur, then researching a startup loan could be a good place to start. If you’re an established business with assets looking for a larger sum to grow your business then a secured loan could be a better option.
First, find out how much you need to borrow to achieve your goals. Cost things out carefully and borrow only what you need. If you borrow too much then you pay interest on an amount you didn’t really need.
Think about how long you need to repay the loan and what you can afford each month. The longer the term, the more interest you pay. Equally if you agree to pay back more than you can afford each month then you might find yourself in difficulty.
Shopping around could save you money too. Different lenders offer different interest rates.
Browse different business loans available to you
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See how to apply for your chosen business loan
Before you apply, check both your personal and business credit score. Knowing your credit score could help to give you an idea of whether a lender is likely to approve your loan.
It's worth checking your business accounts too and making sure everything is in order as a lender is likely to ask to see your business bank account statements.
Gathering any other supporting information can help too. Providing details of your business's assets, your business plan, forecasts and balance sheets all help the lender understand your business’s situation.
Once you’ve got the necessary information together, you can usually apply for a business loan online or in a branch. The lender will tell you what you need to apply. Usually you’ll need to provide information and ID to prove your business is eligible for the loan and can afford the repayments.
The amount of time it takes to approve your loan depends on your circumstances and the type of loan. The lender carries out its checks and it may ask for more information from you too. The process can take longer if you’re applying for a secured loan where the lender needs to value your assets.
Business loans aren’t the only way to help your business’s financial situation.
Crowdfunding can be a helpful way to pitch your business and appeal for funds. Usually you set a target amount you’re seeking from investors and offer perks to encourage investment.
Government grants might be an option, depending on your business sector. Grants aren’t like loans as you don’t need to pay them back.
Business credit cards can help with day-to-day transactions and expenses. They usually charge a higher interest rate which can build up if you can't clear the balance in full each month.
Business overdrafts can help if you have a cash shortfall. They can be expensive with high interest rates so may suit short-term borrowing needs rather than being a long-term alternative.
Invoice financing is effectively a cash advance on money you’re owed from unpaid invoices. Usually a bank lends you the money for a fee and once the invoice is paid you pay it back to the bank.
Whether your business needs a loan depends on its circumstances. It’s important to think carefully whenever you apply for a loan and only borrow what you need.
Yes, small businesses can get a loan. The type, loan amount and interest rates may differ though depending on your business’s size, revenue and time trading.
APR stands for Annual Percentage Rate. This is the total interest you pay annually on a loan amount. The lower the APR, the lower the monthly repayments.
No, you don’t need to be the owner of a company to get a loan. For example, if you’re a registered company director then you can apply for most types of business loans.
The repayment schedule is agreed as part of the application process. The details can be found in your loan agreement if your application is successful.
Yes, your personal credit score could be considered in your business loan application. This is especially true if you’re a new business owner with no business credit history.
