What is a business loan?

A business loan is an alternative to a personal loan – to be used specifically for business use – offered to organisations of any size that require adequate capital to fund start-up expenses or to cover the cost of business expansions. Business loans are usually taken out by sole traders or companies with limited liability. With a business loan a certain sum of money is lent over a period of years with the interest rate and monthly payments being fixed over the agreed loan term. The company then repays the money borrowed according to the loan’s terms and conditions.

What are the benefits of taking out a business loan?

Setting up a business or expanding an existing one can be an expensive undertaking. A business loan provides the financial support required to get established or grow without having to invest personal funds. Business loans can also offer much needed short-term financial support to tide you over during tough economic periods and to help with business cash-flow.

Start-up business loans

If you require a large sum of money to enable you to get things up and running then a big start-up loan is the best way to cover the various initial costs of setting up your business. Rather than focusing on small business loans some loan providers specialise in helping new businesses with start-up business loans.

Small business loans and short-term business loans

Small business loans can be crucial to meet the demands of clients and employees as well as proving central to the cash-flow of smaller businesses.

If your business plan requires access to short-term finance, some lenders will offer business loans of up to £30,000 for up to a year. You can usually choose a fixed rate of interest, so your monthly repayments are the same making it easier to budget. Or look at variable rate business loans which mean your repayments may fluctuate.

A short-term business loan can provide an invaluable cash boost if your business is expanding or you need help to manage your cash-flow. Short-term business loans usually have a six-month term so you need to be in a position to repay the loan quickly.

Medium to long-term business loans

A medium to long-term business loan typically enables you to borrow for up to five years. This offers financial security and support for your business venture for several years making it easier to plan and budget as the business takes off.

Some lenders offer larger business loans spread over a longer repayment term which can be a good option if you need to cover one-off business expenses or expansion plans. The longer the loan terms, the lower the monthly payments, as the costs are spread over a longer period of time.

It’s beneficial to keep your monthly repayments down when you’re trying to get your business off the ground, as there will be various other set-up costs to fund as you’re getting established. However, remember that lower repayments spread over a longer term will mean you end up paying more interest overall on your business loan.

Getting approved for a business loan

Although any organisation can apply for a business loan regardless of size, some loan providers only approve applications from limited companies. The best rates on business loans are offered to those with a favourable credit history as lenders want to be sure they will get their money back, particularly when people are embarking on a new business venture with no guarantee of success.

So, if you are just starting out in business, lenders usually look at your personal credit rating. The higher your credit score, the more likely you are to be offered a business loan at a competitive rate of interest as it gives lenders the reassurance that you manage money responsibly.

To be approved for a business loan, you usually need to have the business VAT registered. Other stipulations vary from lender to lender. Some loan providers expect a minimum monthly turnover to consider your business loan application. Some lenders require evidence of at least two years of filed accounts, while other providers will lend to businesses with less than two years’ trading history.

Alternatives to a business loan

A business account overdraft can be useful to cover unexpected expenses providing access to additional funds when the need arises. Business overdrafts are usually available for any period up to 12 months.

A business credit card can be a useful way to manage staff spending and usually offers up to 56 days interest-free credit. Other options include cash-flow finance, which enables companies to borrow against the value of their unpaid invoices, and borrowing against assets, for example your business’s property or equipment.

Business credit cards can help big and small organisations to manage cash flow or even to temporarily finance operations. It can also help top boost staff moral giving employees responsibility for business expenditure.

Used correctly, business credit cards help to build your businesses credit profile and if you pay the balance in full each month, you can take advantage of the monthly interest-free spending they allow. A business credit card is often a good alternative for many smaller organisations who find it difficult to get approved for a business loan.

Things to consider before taking out a business loan

Some business loans allow you to specify how much you want to borrow and for how long, with some lenders offering flexible repayment options and others having no early repayment fees. Choose the best business loan based on how well established you are and how soon you think the company will be profitable enough to repay the loan.

The terms of the business loan you choose could have a real impact on budgeting for your business expenses so the key is to find the right financial solution for your particular business venture. Look for loans that are specifically designed for business use to take advantage of better rates and other features designed to help you running your business more easily.