There are many reasons why a business may need an injection of capital, such as to realise expansion plans or to purchase new stock or equipment. However, a big outlay can be tricky if you don’t have the spare cash-flow to cover it so that’s where a business loan can help.
A business loan is not the same as a personal loan as it’s designed specifically for commercial operations. There are many different types of business loans so it’s possible to pick the product that’s structured in the right way for your needs.
If you’re thinking about taking out a business loan, here’s what you need to know.
How is a business loan different?
A business loan is very flexible, allowing from £1,000 upwards to be borrowed with a repayment term that starts from just one month and rises to 10 years, or more in some cases.
They can be used for a wide range of business purposes including:
- Moving to new premises
- Expansion and development
- Purchasing more stock
- Buying equipment
- Recruiting staff
- Clearing debts
A business loan is not based on your personal credit rating but the finances of the business. If you are a relatively new business this can make it more challenging to get approved for a loan. The criteria for the loan will be set by the lender. Some will only provide business loans to limited companies so if you’re a sole trader it can be harder to get the most competitive offer.
Can’t I just take out a personal loan?
When you take out a personal loan you’ll need to tell the lender the purpose for the borrowing. The vast majority of lenders do not permit personal loans to be used for commercial purposes and if they discover it’s been used in this way, they could ask for the full sum plus interest to be immediately repaid.
If you are able to find a personal loan which allows it to be used for business purposes, the debt will be in your name. This means that you will be personally responsible for making the repayments rather than the business. It could also impact your ability to obtain other types of personal credit because it will be counted as part of your household outgoings and not a business expense.
What kind of business loan do I need?
There are different types of business loans available, but not all lenders offer all types. The purpose for the loan will help to determine the most suitable type of credit to apply for.
Very broadly speaking, business loans can be split into unsecured loans and secured loans.
With an unsecured loan, the lender agrees to provide the money without the backing of any kind of security. These are more difficult to obtain.
A secured loan can be easier to be accepted for because you provide the lender with an asset as security to guarantee repayment. You do not physically have to hand the asset over to the lender, but they have a charge over it. This means that if you fail to make the repayments as agreed, they could claim the asset named as security. There are many business assets which can be offered as security including property, machinery or stock.
A cash loan is a very common type of business loan, and the product which is the most similar to a personal loan. The application is assessed based on the finances of your business and if approved, a cash lump sum is paid. You then repay this loan monthly over a fixed period of time.
There are other types of business borrowing which are structured differently such as revolving credit, a cash advance or invoice finance.
For more information about how to obtain a business loan, contact Loans Warehouse on 01923 678 870 today.