Everything You Need to Know About Business Loans
If you’re a business owner looking for a leg up to grow your business, you may explore a business loan. The process for applying for business finance is quite different and typically, a lot more involved and lengthier than applying for a personal or home loan. We’ve put together a comprehensive guide on everything you need to know about small business loans so you can go into this process feeling informed and prepared.
What is a business loan?
Let’s start with the basics. A business loan is a loan intended specifically for business purposes. This loan can be to create, manage or build a business or even to purchase an established business.
Business loans can vary in the amount a lender is willing to offer, and the term of the loan. Interest rates and type, as well as any associated fees. These loans can be fixed or variable and secured or unsecured.
How does a business loan work?
Like many other types of loans, a business loan involves borrowing an established amount from a lender and entering into an agreement where you accrue interest on the amount borrowed and make regular repayments over the term of your loan.
A business loan can be used to:
- Help you start a business
- Help you grow a business
- Assist with cashflow management
- Purchase a vehicle or equipment for business purposes
If you’re considering business finance to purchase an asset, take a look at our blog on asset finance .
How do I get a business loan?
Before applying for your loan, it’s important you understand your primary objective for obtaining finance as this is one of the first questions a lender will ask you.
From here, you should be working out the amount you need to borrow. If you’re using finance to purchase a particular type of asset or vehicle, figuring out how much you need is often straightforward. However, if you’re accessing finance to grow your business or to assist with cash flow, knowing how much you need to borrow can be a little more challenging to ascertain.
Tip: While there may be an amount you would like to borrow, make sure you do the sums beforehand to ensure you can comfortably make these repayments.
Now that you know what you want to borrow money for and have some idea of how much you would like to borrow, it’s worth speaking with a commercial finance broker. They can assist you with the steps we detail throughout this piece.
Being prepared with detailed financial documents and a business plan can assist the lender in making a decision sooner. When reviewing finance applications, lenders are essentially reviewing the associated risks. Establishing you have an understanding of your business finances and a plan for what you would like to achieve shows a lender you’re prepared for, and that you’ve done your research. They want to see financial stability and a plan for how you plan to maintain or grow your revenue.
From here, it’s worth considering whether you will be applying for secured finance or unsecured finance and whether you would like a fixed or variable rate loan. A variable rate may suit you best if you’re confident you can repay the loan even if rates increase. A fixed interest rate may be able to help you manage your cash flow better by providing certainty and predictability with your repayments.
It is also worth understanding the fees and charges associated with your loan.
What types of business loans are available?
There are several options available for businesses seeking financing. Some of the most popular include:
- Secured Business Loans: For these loans, the borrower is required to provide collateral, such as property or equipment, as security. They generally have lower interest rates, but higher fees.
- Unsecured Business Loans: No collateral is required for these loans, which are based on the borrower’s creditworthiness and cash flow. They tend to have higher interest rates but lower fees.
- Line of Credit Loans: This type of loan provides a revolving credit facility that a business can draw from as needed. It is secured by the business’s assets, and the interest rate is variable.
- Invoice Financing: This option allows a business to borrow against their outstanding invoices, and is often faster and easier to obtain than other types of business loans.
- Equipment Loans: As the name suggests, these loans are used to purchase or lease equipment for the business. They are typically secured against the equipment purchased.
- Commercial Property Loans: These loans are used to purchase or refinance commercial property for the business, and are usually secured against the property purchased.
- Merchant Cash Advances: Based on a business’s credit card sales, merchant cash advances are short-term loans with a higher risk of default and generally more expensive than other loan options.
It’s important to consider the specific needs and goals of your business when choosing a loan type, and to compare the terms and conditions of multiple lenders to ensure the best fit.
Can I get a business loan to purchase an existing business?
You can use finance to purchase an existing business. However, this may not be a business loan as such. You may have to apply for unsecured personal finance, or potentially, even secured finance using an asset like your home.
In this instance, it’s best to speak with a commercial finance broker sooner rather than later.
What are the costs involved with a business loan?
The costs associated with a business loan vary based on the lender and loan type. Some of the typical costs include:
- Interest: This is the cost of borrowing the loan and is usually calculated as an annual percentage rate (APR).
- Origination Fees: A one-time fee charged by the lender to cover the expenses of processing and underwriting the loan.
- Closing Costs: These are fees that are paid when the loan is approved and may include appraisal fees, document preparation fees, and title search fees.
- Late Payment Fees: Fees that may be charged if a payment is missed.
- Prepayment Penalty: A fee that may be charged if the loan is paid off before the end of the loan term.
- Guarantee Fees: A fee that may be required if a personal guarantee or other security is used to secure the loan.
- Default Fees: Fees that may be charged if the loan is defaulted on.
Keep in mind that these costs can add up, so it’s essential to fully understand the terms and conditions before applying to avoid unexpected expenses.
Can I get a business loan if I have bad credit?
Bad Credit Business Loans do exist and may be accessed by business owners with poor credit scores or defaults. However, due to the risks associated, often in these circumstances, you will most likely have to pay a higher interest rate, the conditions may be less desirable and there may be additional fees that are sometimes hidden.
If you’re in a position where you think you may have bad credit or you have defaulted, it’s worth speaking with a commercial broker. Unfortunately, there are many bad credit loans that have substantially high interest rates and expect large repayments which may provide initial relief, but in the long term, these may not be manageable.
What are the collateral requirements for a business loan?
The collateral requirements for a business loan vary based on the lender and loan type. Some common forms of collateral include:
- Secured Business Loans: For these loans, the lender may require the borrower to provide collateral in the form of property or equipment that can be seized in the event of default.
- Line of Credit Loans: This type of loan is typically secured by the assets of the business.
- Equipment Loans: The equipment purchased with these loans is typically used as collateral.
- Commercial Property Loans: The commercial property purchased with these loans is usually used as collateral.
- Unsecured Business Loans: No collateral is required for these loans, though a personal guarantee from the business owner or another party may be necessary.
It’s important to keep in mind that not all lenders will require collateral for all loan types, and the specific requirements will vary. To ensure a clear understanding of the collateral requirements, it’s advisable to discuss this with the lender before applying for a loan.
Can I get a business loan without collateral?
If you’re in a position where you’re trying to obtain business finance without substantial assets, you may be able to apply for unsecured finance. Keep in mind that typically, interest rates are higher for unsecured loans.
When applying for unsecured finance, lenders will review your credit history, cash flow and your perceived ability to repay the loan. You can also consider personal guarantees meaning your personal assets can be used to cover the outstanding debt if you are unable to repay the loan amount.
We’ve explored some of the commonly asked questions around business loans, but if you still have more questions, please add your questions below or feel free to get in touch for a free meeting with one of our acclaimed commercial finance brokers.