If your business needs a cash boost, you may be considering a small business loan. We’ve taken a deeper look so you can find out how small business loans work and compare some of the options.
From government business loans to entrepreneur loans and backing, you can get help funding your business.
What is a business loan?
A business loan is a loan for business purposes. The type of business loan you apply for is likely to depend on your business circumstances and why you need the money.
You can apply for a startup loan to help get your business off the ground, a short-term loan to help ease cash flow issues, or a long-term loan to fund the expansion of your business, for example.
When to get a business loan
Whether you can get approved for a business loan depends on the criteria of the lender. There’s some funding available for businesses that are just starting out. But for other loans, you’ll need to have been running your business for a certain amount of time.
Understanding business loans
There are several decisions you need to make when you’re looking for a business loan, and several things that you need to understand when you’re comparing loans. These are some of the key points.
Fixed rate vs. variable business loan
If you have a loan with a variable interest rate, the rate can go up and down, whereas a loan with a fixed rate means your repayments tend to be predictable. Most small business loans are fixed rate loans.
Unsecured vs. secured business loan
A secured loan is backed by an asset (property, machinery or a vehicle, for example), which means the lender can claim ownership of the asset if the loan isn’t repaid. Unsecured business loans aren’t backed by an asset, but the lender may ask for a ‘director’s guarantee’ instead, which means they may pursue the director for repayment if the loan isn’t paid off.
Whether you’re offered a secured or unsecured loan may depend on how much money you want to borrow. Large loan amounts will usually need to be secured, whereas lower amounts are often unsecured. Unsecured loans may have higher interest rates, as they’re riskier for the lender.
Long term vs. short term business loan
You’ll also need to make a decision about your loan term, which is the length of time that you have the loan for. This is likely to depend on what you need the loan for, and how quickly you think you’ll be able to repay it. Different lenders have different minimum and maximum loan terms, and the term you’re offered may depend on your circumstances.
Business loans compared
Compare business loans and you’ll soon work out the categories and types of funding available, from government-backed Start Up Loans, to loans from peer-to-peer platforms, to options from high street and big-brand banks.
It can be tricky to get approval for a business loan, and the lender will ask for lots of paperwork as part of the application process, including business plans and accounts. But with our help, it should be much easier.
Bear in mind that, as well as the eligibility criteria mentioned for specific loans below, most business loans require that you’re at least 18 years old, a UK resident, and that you’re not bankrupt or in a debt management scheme.
Whether a business loan is right for you depends on your circumstances. Remember that interest rates can be high and there are penalties for missed payments, so make sure you can afford the loan before you take it out.