Business loans FAQ

Looking for a loan for your small business? We cover the most important information you need to know in our frequently asked questions about business finance.

Jim Kersey Published on 28 June 2018. Last updated on 20 January 2021.

What are business loans?

Business loans are a source of finance that is used to help a company get off the ground or take their next step. These loans are specifically designed for companies that need to make substantial purchases to develop their company, or find themselves in need of extra funding to cover an increase in outgoings, such as renting new premises or hiring additional staff.

Usually, the term 'business loans' applies primarily to financial products designed specifically for small to medium sized businesses, while larger organisations will instead access corporate finance agreements. There is a huge range of different business loans available on the market today, and the most appropriate financial product for you will depend on you and your company's unique needs and circumstances.

What different types of business loan are available to me?

While there are many different types of small business loan, most can be categorised into a handful of lending terms. Firstly, as with personal loans, it is possible to apply for business loans that are either secured or unsecured. Secured loans tend to be held against some form of collateral, perhaps a property or vehicle that can be repossessed if payments aren't made. Again just like with personal loans, unsecured loans which require no collateral can carry higher interest rates to help the lender hedge against the added risk.

Secured and unsecured loans are a more general way of categorising all loans. Business loans are split into different types of specialist loans to suit different circumstances, the most common of which are:

  • Start Up Loans: Designed to allow companies to access the capital they need to fund the development of their new business, these tend to be Government-backed.
  • Invoice financing: These allow businesses to borrow money based on invoice amounts owed. They're often seen as a solution to cash flow problems.
  • Asset financing: A funding solution that helps companies to purchase or lease the assets and tools they need to grow.
  • Merchant cash advances: A funding solution through which businesses are given a cash advance in exchange for providing the lender with a percentage of all the sales they process through card payments.
  • Bridging loans: Designed primarily for property investors and developers, bridging loans provide a lump sum of cash to enable the purchase of a property or a business before the buyer has freed up their own funds, for example through the sale of an another property.
  • Tax loans: A loan solution that allows a business to meet its tax liabilities by spreading repayments across a period of months.
  • Credit lines: A form of on-going loan wherein businesses can borrow and repay money on a consistent basis up to a specific limit.

Where can I get a small business loan?

Business loans can be accessed from a range of lenders, including traditional banks, specialist lending providers, crowdsourcing platforms, and even peer-to-peer markets. The "Small Business Enterprise and Employment Act" of 2015 now dictates that the major banks in the UK will be legally obligated to refer the SMEs whose applications they decline to an alternate provider. The decision came as research found that banks reject approximately 100,000 small business loans per year, and most companies aren't sure where to seek finance beyond traditional banks.

How much can I borrow through a small business loan?

Business loans can range from hundreds of pounds to hundreds of thousands, depending on the type of loan, provider and the circumstances of your business.

How much can I borrow with a business loan?

The amount of business finance you can access will depend on the circumstances of your business, the type of loan you choose, and the term of that loan. Different providers will also offer different amounts. For a Start Up Loan, you can borrow between £500 and £25,000, whereas a commercial mortgage will enable you to borrow a great deal more - depending on factors like the company's credit rating, the state of the property in question and your ability to repay.

What kinds of terms are available?

The answer to this question is dependent on the kind of loan you choose. With bridging loans, you may make all your repayments within a single year, whereas with commercial mortgages, repayments may be spread across 10 to 25 years. In most cases the longer that you borrow for, the more you will pay in terms of interest, and this is an important factor to be aware of when you are choosing the ideal business loan for your specific circumstances.

What can I use a business loan for?

A business loan can be used to fund the purchase of new assets, or invest in business development. Companies can use loans to acquire or rent premises and office buildings, vehicle fleets, new equipment for their staff or even to make new hires. Usually, the lender that you approach will consider the reason for your loan, alongside other crucial factors like your ability to repay the amount owed, when deciding whether or not to loan the money.

It's a good idea to choose a loan that is suited to your specific needs in some cases. For instance, you would use a commercial mortgage to purchase property, asset financing to fund the purchase of new tools and equipment, and a Start Up Loan to help you move into the world of entrepreneurship for the first time. This way you're working with repayment plans that cater to your circumstances.

Can I get a loan to buy a business premises?

Yes. A commercial mortgage can be used to purchase a business premise. It is a form of secured loan, wherein the premises itself will be used as a guarantee against any non-payments, and works in much the same way as a residential mortgage. It's crucial to make sure that you can make repayments on time with a commercial mortgage, as your property can be repossessed if you break the terms of your contract.

What are the alternatives to business loans?

There are plenty of forms of finance available to small businesses depending on your specific circumstances. For instance, government funding grants can help you to kick start your business if you meet a series of specific guidelines. There are also solutions from organisations like The Prince's Trust, and CDFIs. On the other hand, you might also want to consider angel investments or venture capital if you're comfortable with having investors involved in your business and working to an ambitious growth timeline.

Who can apply for business loans?

Each type of loan comes with specific guidelines for a successful application. For most, as a director you will need to be over the age of 18, have a relatively good credit rating, and have had no county court judgements made against you within the last 6 years. Some loan providers will stipulate a minimum annual or monthly turnover level for the business. Additionally, for a Start Up Loan, your business cannot have been trading for more than 24 months.

I want to start a business - can I get a loan?

Primarily, the best loans for businesses that are just getting started are Start Up Loans. These are loans backed by government schemes that are designed to give businesses the capital they need to enter their chosen industry. You will need a plan for repaying your loan in place, and you will be required to have an established business plan, but loan recipients will have access to a period of free mentoring following their successful application.

How do I choose a business loan?

There is more to choosing the right business loan than finding out which lending options are available to you. As with any financial product, it's important to ensure that you are prepared to meet the monthly repayments laid out in your contract. One important point of comparison for business loans is the APR (Annual Percentage Rate) offered by your provider. The APR is the annual cost applied by the lender which takes into account fees and your interest obligations. The APR does not include the repayment of the actual money borrowed.

Additionally, it's worth thinking about the term over which you would like to repay your loan. If you need a long-term loan, then certain loan types will not be appropriate, and vice versa on shorter terms. While examining terms and APRs, remember to ask about what happens to you if you default on repayments, and how you will be able to discuss concerns with your lender.

What do I need to do before I apply for a business loan?

The documentation and information you will need to successfully apply for a business loan will depend on the type of loan you hope to receive. Usually, it's a good idea to consider your credit history, the outgoing and incoming cash flow of your business, and your ability to make repayments each month. If you feel that you might struggle to make repayments at certain times of the year - perhaps with seasonal market changes, then you might want to think carefully about your ability to access a loan.

Will I be accepted for a business loan?

The answer to this question depends on various factors, including your business's financial accounts, history, turnover, and cash flow. If you are part of a partnership or are classed as a sole trader, then your personal financial circumstances may need to be considered too.

How long does the approval process for small business loans take?

The length of time involved in successfully applying for your business loan will depend on the type of loan you are trying to access, and the lender you're working with. Commercial mortgages often take longer to get approval, as a number of steps are involved in properly valuing the property and the arrangements for the sale.

How do I check my company's credit rating?

There are various online agencies that allow you to check your business credit rating in return for a small fee, or a subscription to their services. These services allow you to access and evaluate the files that are held about your business in regards to financial transactions, and should give you an insight into your perceived credit worthiness in the eyes of lenders.

I have a poor business credit rating - can I get a loan?

The severity of your credit history and the legal actions that your business has been exposed to will often dictate whether you can access business loans. Most loans will require no county court judgement to have been made against you, and if you have fallen into arrears in previous lending arrangements conventional channels may refuse you credit.

In some cases, you may be able to apply for specific specialist loans through certain lenders, but it's worth noting that a poor credit rating will limit your choices for finance, and may result in much higher interest payments.

About the author:

Jim brings together unique data insights, contextual knowledge and thought provoking themes, to shed new light on important issues affecting both UK businesses and individuals. Read more

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