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Home » Business Loans

What Are Business Loans?

Businesses need an adequate amount of capital to fund startup costs or finance business expansions. Thus, companies commonly take out business loans to get access to the necessary financial assistance. As with any type of loan, it is a debt, which will be repaid by the company with added interest according to the loan’s terms and conditions.

A business loan is obviously borrowed money intended for business purposes. Some business owners use these loans to pay for employees’ salaries and wages until their new company gets stable enough. Other companies invest the loan funds toward office supplies, inventory, or new business projects.

Business loans come in several forms, which include bank loans, microloans, mezzanine financing, business cash advances, and much more. A business loan may be either secured or unsecured. With a secured loan, the borrower guarantees an asset such as building or plant, equipment, stock or vehicles against the loan. If the debt is not repaid, the lender may claim the secured asset. Unsecured loans do not have collateral, but failed to repay the debt, the lender will have a general claim on the company’s assets.

If you are thinking of whether to get a long-term, medium-term, or short-term business loan, it can only be answered depending upon your own personal circumstances and the status of your business. A medium to long-term business loan can help offset some of the costs associated with starting a business. It enables you to keep your monthly repayments low by spreading the cost over a longer period of time, usually years or even decades.

Small businesses oftentimes need short-term loans instead of long-term financing. Most short-term loans reach maturity in less than a year. Short-term business loans are perfect for business owners who are looking for immediate funding, which will be paid back over a short period. Moreover, short-term loans are easier to obtain than long-term business loans.

Traditional bank loans are the most popular source of funding, but securing a loan from a bank is not easy. Microloans are smaller loans, usually for loan amounts of £100,000 or less.  Mezzanine finance secures a company’s business loan on its equity, which allows the lender to claim part-ownership of the business if the loan is not paid back on time and in full.

There has been a rise in the number of online lenders offering small business loans as well. Nonbank lenders that make small business loans have recently become popular alternatives to bank loans. These online lenders offer fast and convenient services to business owners without requiring lengthy and tedious paperwork.

Business Loans in the UK

In the UK, most businesses go to banks for business loans, but there are many private lenders that offer this type of loan as well. For a business loan, you can borrow £5,000 to £1,000,000 and pay back over six months to five years in both banks and private lenders. Some lenders allow businesses to borrow as much as £5,000,000, depending on the type and size of the business.

In recent years, however, the relationship between banks and small businesses has been improving as more and more banks realize the strength and importance of this growing market. Many major banks have added special services and programs for small businesses. However, banks do not offer these loans to start-ups with poor cash flow.

The bank will usually require the business to provide some security or collateral for the loan. In the case of a start-up, this security often comes in the form of personal guarantees provided by the business owner. Lenders typically require principals with 20% or greater ownership in the business to provide a personal guarantee. Small business lenders may waive the personal guarantee requirement if the business has strong business credit scores and revenue

Bank loans are the most common way to finance your business, but as with any other type of loan, borrowing from a bank has advantages and disadvantages. You should consider this carefully before making your move.

Everyone wants a bank loan mainly because banks offer lower interest rates than that of private lenders. This is because depositors of banks, which serve as their retail customers, keep a lot of money in their checking and savings accounts. Private lenders, on the other hand, either have to get funds from investors who are looking for decent returns or from other banks and financial institutions who lend these private lenders funds at higher rates than it costs them to acquire that money.

Direct Lenders of Business Loans

Commonly, business loans are provided by banks. Many companies will consult their bank first, where they conduct their day to day business with, before enquiring with other loan providers. Comparing different lenders will help you get the best deal suitable for your financial need. Aside from banks and private lending companies, business loans can come from other sources such as credit unions, which make loans to small businesses.

Choosing a direct lender is a great way to get business funding without any middleman or broker markups. Just present to the direct lender how much you need, and they will provide a flexible solution you can afford, one without any add-ons or hidden fees.

Business Loans For Those With Bad Credit

All business loans will require a credit check, as mandated. Credit checks won’t necessarily be carried out on the shareholders or directors of the business. This way, the bank will determine the ability of a business to make repayments. Therefore, your company’s credit check will impact the terms and interest rates that you are offered.

For established businesses, the lender’s focus of attention is the company’s records. Some lenders will check the personal credit rating of the owners as well, especially if it’s a start-up business, which does not yet have any financial history.

Bad credit business loans are for business owners with a bad personal credit rating or weak business cash flows. This type of funding usually requires daily or weekly payments and the fees are determined before funding takes place. This type of loan has very little paperwork required and funding can take place as fast as the same day. This is a perfect solution for those struggling to get a traditional financing.

This non-traditional lending option can help you obtain the funds you need for a loan, equipment leasing, microloans, and more without a personal guarantee. Those that have poor credit history will be offered you a customized loan option that meets their needs. Most of these lenders feature flexible repayment that allows you to repay your loan easily and conveniently.

These lenders have custom tailored business loan solutions for those individuals that have bad credit for reasons such as tax liens, bankruptcy, or late payments and charge-offs. On the downside, however, the interest rates on these loans may be quite high.

Another solution for poor credit is the asset-based lending. It has become a popular choice for small businesses lacking the credit rating or track record to qualify for other forms of finance. It involves borrowing against one of the company’s assets. The lender looks into the quality of the collateral rather than the credit rating and prospects of the company. A business may take out a loan against several different types of asset including premises, plant, stock or receivables.

Business Loans With A Guarantor

Trying to get a business loan with your bank can be difficult if you don’t have a deposit or a residential property as security to put towards the loan amount. Fortunately, there’s an option for a business loan with a guarantor. It allows you to borrow 100% of the cost without a deposit or the need for you to put up your property as security.

You won’t need to provide a deposit or any further security to get approved if you have a guarantor. The guarantor can be your parents, a friend or a business partner, who will use a property they own as security for the business loan.

A business partner or a friend can also act as guarantor for the business loan. However, in order for you to get an approval, you have to show that they have a legitimate interest in the business. In fact, the need for the guarantor to have a vested interest in the transaction may sometimes see parents being unable to provide a guarantee. The deal has to the bank to make sense from a business perspective. The guarantor must be of relevance to your business.

If you want to buy an existing business or to put up your own business, you will always need to have your own funds or equity in a property that you own as security for the loan amount. Typically, if you need a loan to fund the purchase of a property, the commercial property itself can be taken as security for the loan amount.

However, if you have a standard commercial property such factories and warehouses, you can only use 60-70% of the property value as security. Some specialised commercial properties like a child care centre will be even less value and may not even be accepted as security at all. So, ultimately, you’ll need a security for the loan and this where a business loan guarantor can help.

The drawback, however, is the risk to the guarantor that they could potentially lose their property in case you default on your business loan. If the reason for your default was that the business was in financial trouble or not, and if the sales proceeds from the business are enough to cover the debt, your guarantor’s property will be safe.

Even so, you and guarantor should be aware that the most common reason to default on a business loan is that the business is unsustainable. If you have a business loan guarantor, keep in mind that it’s likely that their property will also have to be sold to pay off the debt. However, the bank will only use enough funds to pay off the debt and the remainder of the sales proceeds will go to your guarantor.

Business Loans With No Guarantor

If you cannot find someone who can act as a guarantor for your business loan or you’re just not comfortable having a guarantor, there are other solutions available to you depending on the amount you need to borrow for your business. While these solutions don’t require you to have a guarantor or a residential property as security, you would need to be in a strong financial position and show that your business is in a healthy position too.

Debtor finance is one of your options, where some lenders will allow you to borrow up to 90% of outstanding customer invoices if you’re a low-risk borrower with strong business cash flow. You may also qualify for an unsecured overdraft. Lenders may offer unsecured overdrafts of up to £50,000. Equipment or motor vehicle finance is another option for you to consider, where you are actually lending against the value of the equipment.

If you need to borrow more for your business or you need money for start-up capital, your only other options are to save up a deposit or use a residential property you own. With your residential property, it’s your home or an investment property, as first party guarantee.

Instant Business Loans

A small business loan or a business cash advance provides the capital that businesses need without the complications that usually come with traditional lending. Working with banks and conventional private lenders can mean long waiting periods, rigorous review of financial records, and the possibility of a loan denial.

Unlike traditional financing options, instant business loans are able to offer a loan even to those who have poor credit. Moreover, the loan application and approval process are much faster than traditional lending options, so you’ll have the money you need without providing personal guarantees.

The Key Points

Business loans come in many forms and options. The best business loan deal depends on your personal circumstances and business status. It is important that you understand all the options available and determine which one suits your needs. When you have a full understanding of all the facts, you will know whether it is appropriate for you to get a short-term or long-term financing for your business. You may also decide whether to get it from your bank or a private lending firm, online lending or from a credit union. It is also crucial to consider the type of business loan that would benefit your business, and not to lead you further into a financial disaster.