Three key considerations:
- A business loan is a loan specifically intended for business purposes. As with all loans, it involves the creation of a debt, usually with a specific purpose in mind, to be repaid with added interest.
- Traditionally, businesses at all stages of growth have looked first to their own bank for a loan – but there are now many providers, and it may pay to shop around for the best rate.
- If you have been trading for less than 24 months, a Start Up Loan may be an alternative. Established businesses may also consider peer-to-peer (P2P) lending. Leasing and hire purchase agreements may also be a good alternative.
What is a bank loan?
Many people have taken out personal loans in the past, and understand the principles of how they work. In essence, business loans work in exactly the same way. Bank loans are in most cases better suited to larger longer-term purchases, such as investment in plant and machinery, computers or transport.
While it is almost always the case that an entrepreneur will benefit from the knowledge, insight and network of advisers such as their accountant, who deal day-to-day with banks and other finance providers, businesses themselves should cultivate relationships with banks and other finance providers, who may help meet future financing requirements rather than just the immediate needs.
To obtain a bank loan, management must prove to the lender that the business will generate the income and cash to both repay the facility according to the terms of the loan, and service the loan by meeting interest payments.
Market conditions and regulatory requirements, such as those that mandate responsible lending to viable businesses, may also affect the ease with which a business can access a loan or overdraft. It is likely that the business will need to provide security for any money borrowed against other personal or business assets.
Increasingly debt funds are offering loans directly to businesses. This is more suitable for larger businesses and has developed in the wake of the financial crisis, as banks have been forced to reduce the size of very similar to a bank loan in relation to the terms. Often debt funds will co-lend alongside banks.
Other sources of debt finance
If your business is unable to get all or any of the finance you need from a bank, responsible finance providers are a good alternative. They provide fair and affordable loans to new and existing businesses across the UK, and are specifically designed to help the businesses that are viable but unable to meet bank lending criteria – such as track record or security. To find your nearest responsible finance provider visit www.findingfinance.org.uk
We recommend that if you are looking for a bank loan, you speak to your own bank or adviser, or visit the UK Finance website.
To explore the other finance options for your business, go back to the Finance Journey tool.