Business Loans

Business loans (or term loans) are a common option for businesses seeking to raise funds. They involve a lender providing an agreed amount of money, which the business repays over a specified period, along with interest.

They can be used to address a wide range of business needs, from financing large expenses such as purchasing new equipment or property to increasing the working capital available to your business.

How do business loans work?

Business loans come in various forms tailored to meet specific requirements and the type of loan you choose will largely depend on how you plan to utilise the funds. A business loan can be either unsecured or secured:

• secured loans refer to the need for an asset from your balance sheet to be put up by the business as collateral against the value of the loan. If you aren’t able to repay the loan, the asset could be at risk of seizure by the lender.
• unsecured loans do not require any such collateral but tend to be for lower amounts and attract higher rates of interest. Personal guarantees might be required if your business is structured as a company, meaning that the guarantor can be pursued for the debt (up to an agreed maximum).

You can apply for a business loan either online or in person, depending on the options offered by the lender. The approval of your application typically depends on several factors, including your business’ financial performance, its current financial status, and your personal creditworthiness.

If your application is approved, the lender will transfer the loan amount to your bank account. You will then be required to repay the borrowed funds within an agreed-upon timeframe, alongside interest.

The final loan amount offered will be determined by your request and the lender’s assessment of your financial capacity.

What are the benefits?

There are several potential benefits to using a business loan, including:

• possibility of growth: a business loan can be a valuable tool for accelerating growth by offering immediate access to essential funds
• no equity dilution: taking out a loan allows business owners to secure funds without relinquishing any ownership or shares in their company. This means they maintain full control over their business while benefiting from the necessary financial support
• flexibility: most business loans provide significant flexibility in how the funds can be used once they are secured. During the application process, you will typically need to present a business plan detailing your intended use of the loan. However, once the funds are drawn down, you generally have the freedom to adjust or modify your plans as needed, provided you remain compliant with the terms and conditions of the loan agreement.

What are the potential drawbacks?

Like all finance types, business loans can bring with them certain disadvantages, including:

• charges: if you are late with a payment or miss one, you could be charged a fee
• impact on credit report: as part of the application process, a lender will carry out a credit check to determine if you meet the lending criteria for the loan. This will impact your credit report. The same is true if you fail to repay a loan which can make it harder to obtain finance in the future
• lengthy application process: depending on the provider, loan applications can take time. Traditional banks in particular, often require substantial documentation from an applicant including business plans, account history, and financial projections, which can take time to put together
• potential loss of assets: with a secured loan, you run the risk of losing the assets you use as security against the loan if you default. For any personal guarantees, the guarantor can be pursued for the debt (up to an agreed maximum)
• lending criteria: lenders take into account a wide variety of business information before approving a loan application including the financial health of your business, its credit history, and your personal credit rating
• amount borrowed: a lender may approve a loan application but not necessarily for the full amount requested.

How do I apply for a business loan?

There are lots of business loan providers in the UK including high-street banks, challenger banks, Community Development Finance Institutions, and online providers. Typically, when you apply for a business loan through a bank or other lender, this can often be done either online or in person at a branch.