An Ultimate Guide to Small Business Loan

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Businesses have a profound impact on the economy of a nation. Governments of the nations have a special focus on meeting the needs of these businesses as it will help them to respond to long-term economic challenges. In a report released by the British Business Bank, it is highlighted that there are 5.7 million smaller businesses in the UK. And 382,000 new businesses are opened in a year. It takes money to make money. Availability of funds is significant for the growth and development of a business. High street lenders and mainstream financial institutions have tightened their lending criteria due to which only a handful of businesses are able to take help from them. During such situations, businesses turn towards private lenders who offer small business loans. For the smooth functioning of a business, constant cash flow of money is essential. To achieve the growth plans of the businesses, they need to have access to capital all the time.

We aim to answer the following questions in this article:

  • What is a small business loan?
  • Different uses of a business loan
  • Types of business loans
  • Banks vs lenders for a business loan
  • Is a business loan right for you?

What is a Small Business Loan?

In simple terms, a small business loan allows you to borrow money for their business and repay it to the lender over time along with the interest charged on the principal amount they had borrowed. These are also known as short-term business loans as there are startups who borrow a relatively smaller sum of money for a maximum period of 12 months. Different businesses have different needs, affordability, and profit. Some lenders also offer business loans for a period of 1 to 5 years.

Different Uses of a Business Loan

The funds you receive from a business loan can be used for a wide range of reasons, and we have listed down a few popular ones:

1.      Recruiting Personnel

If you are eyeing to achieve success and growth, then you will need more manpower who have the potential to take your business to new heights. Recruiting new employees to come with a cost. It also requires skill, patience and time to find the people who have the same mindset as you. What if someone leaves the company and you need to find a new employee to replace them? It is not possible to have a dedicated HR team for every business that are in their initial stage. So, when you set out to expand your team, you will need money.

  1. Employee Development

Your business will grow when your employees grow. Improved performance of the employees will benefit the overall productivity of the company. To hone the skills of your employees, you will need to arrange for training sessions to prepare them for the bigger and the better.

  1. Consolidating Existing Debt

Existing debt can pinch you any time and may catch you off guard. Incurring debt is a common practice as businesses have to pay for everything – from the cost of daily running costs to expand their business, everything revolved around money. Consolidating the existing debts will help you lower the monthly repayment amount to facilitate growth.

Types of Business Loans in the UK

Different financial products for businesses are designed keeping in mind the different needs and necessities that may arise time and again. Generally, there are two types of business loans:

  1. Secured Business Loans
  2. Unsecured Business Loans

Secured Business Loans

A secured business loan means you have to provide an asset such as a property, or machinery while applying for the loan. As you’re providing collateral, the interest rates for this loan will be fairly lower. And is a perfect borrowing option if the business has a bad credit record.

Unsecured Business Loans

As the name suggests, unsecured business loans are not borrowed against any asset or property. However, lenders may ask you to provide a guarantor so that if you miss any repayments, the guarantor will repay the debt on behalf of you.

How to Apply for a Small Business Loan in the UK – Banks Vs Lenders

Banks always have stringent lending criteria, especially when it comes to lending to businesses. They need you to have a viable business plan to assess your creditworthiness. And if you are a startup, the chances of getting access to finance from a bank are lower. Convincing a bank that you will be able to repay the loan on time or as per the agreement is quite challenging.

On the other hand, private lenders make it easier for businesses to borrow a small business loan. Some of the lenders do not even ask you to provide them with your business plan. Mostly, your loan application is assessed on the basis of your credit history and how long you have been in the business. They run a credit check to know your affordability and creditworthiness.

If you do not have time to search for a direct lender who offers small business loans, you can take the help of loan brokers. Generally, brokers deal with multiple lenders simultaneously and they know which lender will most likely accept your application.

Is a Small Business Loan Right for you?

The answer to this question is – do you make enough money or profit from your business? If you earn considerable annual revenue, then going for a business loan will not hurt your finances. But if you are already running into trouble and your business is not yielding any profit, then you must reconsider your decision to borrow a small loan. Taking out a loan is a big responsibility and if you cannot afford to repay the loan, then try finding some alternatives to this.

Go through the financials’ of your business carefully and calculate the amount that will be left off every month after paying for the loan. If the money left with you is more than enough, then go ahead and apply for a small business loan.

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