How a business loan could help you reach your goals

Business loans: the basics

Setting up and running a business isn’t cheap. Cash for equipment, tools, premises, wages or unforeseen bills can be needed at any time during the life of your business. 

A business loan can help pay for these necessities. Like with a personal loan, you borrow an agreed amount and repay back over a set period of time. Interest is usually added and paid back throughout the term of the loan. 

The difference is that the loan must be for your business. So when you apply, you’ll usually need to provide information about your business. This might include its turnover, profit and details about why your business needs the loan. The application process can be strict and time consuming, so the more information you have available the easier it is. Usually having a detailed business plan to hand is helpful as a loan provider will likely ask to see it. 

There are different types of business loans. Some are designed for start-ups, some to pay for vehicles and some pay invoices in advance. So it’s worth looking at the options if you’re considering a loan and understanding the business need for it. 

Is my business eligible for a loan?

Different types of business loans may have different eligibility requirements. For example a start-up loan is likely going to require you to be a start-up business. But there are general eligibility requirements that apply to most loans. You’ll need to be:

• A UK resident

• Aged 18 or over

In addition you’ll need to pass the provider's credit checks. Information about your business is also a likely factor in a provider’s assessment of your business’s circumstances. Having a detailed business containing information about your business’s turnover, profit, forecasts and strategy can help. 

If your business is more established then it may help to include year-on-year performance records too. This can help the loan provider see balance sheets and statements, all of which may help in their assessment.

Is a business loan risky? 

As with any decision involving credit, the first thing to ask is what can you afford to repay.

If you’re approved for a business loan, a lump sum is typically deposited into your business account. This sum will then need to be repaid over a period of time set by the provider during the application process. It may be months or years. 

Interest is added to the loan and forms part of the overall amount you’ll pay back as set out in the loan agreement. Usually the longer you take to repay the loan, the more interest you’ll pay overall. 

If you agree to repay an amount that you can’t realistically afford, there’s a risk that you could fall behind in repayments. This could have a negative impact on your business’s credit score. It may reflect badly on your personal credit score too. This can make it much harder to obtain credit in the future. So make sure you’re happy with the amount you need to repay. That way you can keep on top of it without falling behind or impacting your business’s cash flow. 

What types of business loans are available?

There are a range of different loan types. Understanding what’s available can help you decide what might be right for your business. Here are some of the more common types of loans you’ll find:

Unsecured - A standard loan where you don’t need to offer up an asset, such as stocks or property, as security. 

Secured - You’ll need to offer up an asset as security for this type of loan. You may get more attractive interest rates or be able to borrow more money in return. 

Start-up - These loans are specifically for start-up businesses. That typically means you haven’t been trading for more than three years. 

Asset finance - If you’re looking to purchase something that’s needed for your business to operate, this could be something to consider. Asset examples include machinery, equipment or vehicles. 

Invoice finance - If your business struggles with consistent cash flow because of unexpected invoice payments, this might help. The provider pays your invoices up front and the client settles the invoice with the provider. 

Peer-to-peer - If you’re less inclined to borrow from traditional lenders, P2P allows you to seek a loan from individuals or other businesses. 

Business vehicle finance - This type of loan can be helpful if your business requires a vehicle and you don’t have the money upfront. 

Government-backed start-up loans - For businesses who have been trading for three years or less and need to borrow £500 up to £25,000. The interest rate is fixed, there’s no application fee and you can take up to five years to repay the loan.