What is a Business Loan?
Business loans are very common and one of the first options for businesses looking to raise finance. The lender provides money that you, as the borrower, pay back, with interest, over an agreed period.
Types of business loans
There are many types of business loans available in the UK. They range from short-term to longer-term loans, and can be either secured or unsecured.
Secured business loans
With these loans, you’ll need to use an asset from your balance sheet as security. The lender may also consider third-party security, such as a guarantee, instead of or alongside other security.
Usually, property is used as security, although other assets like stocks and shares can be used too.
Unsecured business loans
This allows you to borrow without using any business assets as security. Often, you’ll need to provide a personal guarantee that says you’ll pay back the loan personally if the business can’t.
Unsecured loans typically have higher interest rates than secured loans.
How does it work?
Repayment period
Your business loan will have a set repayment period. During this time, you’ll need to pay back the amount you borrowed, plus interest.
The lender may charge you for paying off your debt early as it will have already committed that money to your business.
Interest rate
The rate of interest you pay depends on how risky the lender deems it is to advance you the money.
For example, if you:
- have good personal and business credit scores
- are willing to use an asset as security
you’ll be deemed less of a risk than someone who:
- has poor personal and business credit scores
- is unwilling to provide security
As a result, you’re more likely to be approved for a loan with a favourable interest rate.
The lender might also offer you a fixed or floating interest rate. A fixed interest rate doesn’t change, so you know exactly what you need to pay for the duration of the loan. Floating rates can change, according to both the lender’s interest rate and the rate set by the Bank of England.
What are the risks?
Charges
You might have to pay a fee if you’re late with a payment or miss one altogether.
Your credit report
The lender will carry out a credit check to determine whether you qualify for a business loan. This will have an impact on your business credit report. If you default on your loan repayments (fail to make them), it may affect your business credit report and/or your personal credit rating.
Assets as security
Any assets you use as security (property, for example) may be at risk if you default on a business loan.
What do I need to consider?
Every loan and loan provider is different. However, there are some common requirements that all applicants will need to meet. Your business must:
- be able to demonstrate that it can afford to repay the loan
- be based in the UK
- have no late payments or outstanding county court judgments (CCJs)
Your business credit score will have a direct impact on whether or not your application is approved. However, when reviewing your loan application, lenders are likely to check your personal credit report and score too.
If either score is poor, you may find it more difficult to get a business loan. At the very least, you may not get the low rate of interest you’d originally hoped for. Learn how to improve your business credit score
There are several websites that let you check your credit score online before you complete a loan application. They also provide details about how your score is calculated and what you can do to change it.
