What is a business loan?
A business loan is similar to a personal loan, but is specifically designed for business use.
Key takeaways
A business loan can be used for working capital, equipment purchases, property, and more
Loans can be secured (with collateral) or unsecured (without collateral)
Late payments or missed repayments can harm your company’s credit record
Any sized firm can apply for a business loan
What is a business loan?
A business loan is when lenders borrow money to companies rather than an individual. Like with any other type of loan, the money is paid back (usually every month) until the debt is clear. As the lender is loaning money to an organisation, you’re usually able to get more money than you would with a personal loan.
How do business loans work?
You can apply for a business loan online or in-person depending on the lender. You being approved for the loan will depend on your company’s financial outlook, state of finances and your own creditworthiness. Once approved for the loan, the lender will borrow you the funds you’ve asked for and you’ll have to pay back the loan within an agreed timeframe.
How much you’ll be able to borrow will depend on what you’re asking for as well as your firm’s finances. With a business loan, you could be offered anything from £1,000 to the millions factoring in what you’ve applied for as well as what the lender thinks you can afford. Loan repayment lengths for business loans can range from a year to fifteen years.
What are the different types of business loans?
There are many types of business loans available in the UK, however they’ll fall into two categories:
Secured loan: With this loan your business can borrow money by putting down a business asset as security. A business asset is essentially anything your business owns and could be stocks or property. If you’re unable to pay back your secured business loan, then the lender will sell what you’ve put down as security. The benefits of borrowing this way is that the interest rates are lower and larger amounts will be available. However, you need to make sure you’ll be able to pay off the loan as you risk losing your secured asset
Unsecured loan: This type of business loan lets your company borrow money without needing to use any of your business assets as security. As an unsecured business loan carries more risk for the lender, expect to pay higher interest rates when borrowing this way
Other types of business loans include:
Short-term: If you need to cover an emergency expense then a short-term business loan could be ideal. This type of loan will have a shorter repayment of length of usually 3 to 12 months
Long-term: If you need to borrow money for an extended period of time then a long-term business can range from 5 to 30 years
Cash advance: This is when you borrow money against your company’s future profits. So, for example, you borrow £100,000 to revamp your offices and then pay a certain percentage of every card transaction until the loan is fully paid off
Bad credit: If your business has a bad credit record, you might find it harder to borrow. However there are specialist lenders who cater to companies with low credit scores and offer bad credit loans. However, with this type of loan expect to pay higher interest rates
Start-up: If you have a new company, then a start-up loan is a way for you to borrow money to get your business up and running. You can also apply for a government start-up loan which has certain eligibility requirements such as trading for less than 36 months
Small business loans: If you have a small business then this type of loan is specifically catered to companies of this size. These loans are usually unsecured and can be used for a range of business needs
Is my business eligible for a loan?
Whether your business will be eligible for a loan will depend on a number of factors such as your age, credit record and what type of loan you’re after. You’ll usually have to be 18 to qualify for most business loans. It’ll be easier to get a business loan if your company has a good credit record, this is essentially a credit rating for firms. Your company’s credit record can be boosted by paying back loans on time, the state of your own credit score and using business finance instead of personal credit.
What are the pros and cons of business loans?
Here are the benefits and downsides to getting a business loan:
Advantages:
Help with cashflow: Running a company can be expensive and a business loan can help to tide you over when times are tough by offering access to short-term finance
Different loans help in different ways: Start-up loans can offer a big loan when you first set out running your own business, while small business loans can prove vital when managing the demands of employees, clients and cashflow for a smaller business
Fund and grow your business: If you’re just starting out with our business, you may not have enough capital just yet to get your business up and running. With a business loan you can fund equipment, office space and whatever else you need to get your company off the ground
Disadvantages:
Could damage credit record: When applying for a business loan, your company’s credit record is taken into account. If you miss loan repayments or make payments late you run the risk of damaging your credit record, making it difficult to borrow money in the future
May lose business assets: If you opt for a secured business loan and don’t keep up with payments, you could lose the business asset you put down as security. This is why it’s important to carefully think before choosing any type of secured loan
Stricter eligibility criteria: Lenders can be more stringent when approving loans for business owners and there is more to consider such as the your company’s financial outlook, the firm’s credit record and your own credit score
How quickly can I get a business loan?
There isn’t an exact number of days it’ll take for you to get a business loan. However, how long it’ll take to get the funds will be impacted by the type of business you have and the loan you pick. Generally speaking, secured loans take longer to get than unsecured loans as your assets will have to be valued and this can lengthen the process.
What happens if I can’t repay my business loan?
If you miss loan repayments, then you face having to pay late payment fees with interest added. You may also be charged with administration fees. When you don’t make loan repayments, the lender will register this on your company’s credit record, making it harder to be accepted for loans. If you’ve chosen a secured loan, then the lender will seize your business assets.
Who can apply for a business loan?
Any firm can apply for a business loan, no matter how big or how small, although some providers will only lend to limited companies, so you need to check this.
Crucially, what you need to realise is that in the uncertain economic climate, it has grown a lot harder for almost any business to get accepted for credit. To apply for a business loan, your business will usually need to be VAT registered; there may also be a minimum monthly turnover.
Some providers may also stipulate that you have at least two years of filed accounts, although certain lenders are happy to lend to businesses with less than two years’ trading history.
Other useful guides
If you want to brush up your knowledge of business loans, then we have more guides for you to read:
Long-term business loans guide
Secured business loans explained
Everything you need to know about small business loans
Why apply through MoneySupermarket?
If you are looking for a business loan, you need to spend time carrying out a little research, as there are different types of loan on offer from a host of providers.
The easiest way to compare all the loans available in one place is by using a price comparison website like ours.
With just a few clicks on our free and independent tool, you can see details of the rates and features of the business loans on offer to help you find the best business loan for your needs.
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