Business loans

A business loan is a secured or unsecured loan of cash to a business from a lender. Business loans operate very similarly to personal loans. Arrangements can be short, medium or long-term and may be interest only or repayment. They are used both by business wishing to expand but without the available funds to do so and also by businesses requiring working capital.

The details

A business loan involves an agreement between your business and a lender under which they provide a cash lump-sum now in return for future monthly payments. They operate as follows:

• Following a successful application, the lender pays an agreed cash sum to your business
• Your business uses the cash to fund its activities
• Regular repayments are made by your business to the lender
• The arrangement ceases after a fixed period of time agreed in advance with the lender

Monthly payments usually involve both interest on the amount borrowed and an element of repayment, meaning your business will owe nothing after making the final payment. Occasionally, interest only business loans may be offered in which case the full amount borrowed will have to be repaid to the lender when the arrangement ceases.

Interest rates may be fixed or variable. In addition, your business may also be liable for various other costs following agreement including arrangement and legal fees. Early repayment may also attract a financial penalty.

Business loans are often considered harder to arrange than personal ones. Lenders will want to ensure your business is able to meet the repayments which may mean going into detail over how your business operates, its anticipated cash-flow, expansion plans etc. Additionally, the lender may require assets to act as collateral for the loan – if your business doesn't have any assets, the lender may require the owners of the business to provide these assets personally (e.g., your home).

Who provides business loans?

Business loans are mainly provided by the banks, although specialist funding providers (including 'crowd-sourced' loan providers) are on the market too. Additionally, a number of public sector-backed organisations (for example, local councils) provide business loan schemes.

Many businesses use independent brokers to negotiate on their behalf rather than going direct to potential lenders; you may have to pay a fee for this service or the broker's cost may be paid by the lender directly.

Who are business loans suitable for?

Businesses that require funding to expand or to meet working capital requirements and who are capable of demonstrating their ability to meet the anticipated repayments.

Advantages

• Business loans can be one of the cheapest forms of business funding
• You will not have to give away a share in your company to the funder
• Loans can be arranged to give certainty over upcoming payments or even repayment holidays, helping with cash-flow management

Disadvantages

• Business loans are not always easy to secure
• Personal guarantees may be required from the business owners, putting non-business assets at risk
• Repayments will decrease the future profits of your business