Small business loans can be a valuable source of finance for smaller businesses. Specifically created for small businesses and small and medium enterprises (SMEs), which often find it harder to secure traditional bank loans because they don’t have the same collateral as larger businesses. These loans usually have shorter repayment terms and higher interest rates than bank-issued loan products. Small business loans can be used for a variety of different reasons, and are typically used to bolster working capital, cover periods of negative cash flow or to fund investment opportunities.
Understanding Small Business Loans
Small Business Loans – like many other types of business loan – work on the basis of a lender providing a business with a sum of money which is then paid back over time. The total amount of money the business needs to pay back (the interest rate) and the timeframe in which it is paid back will vary dependent on the lender. Some lenders will have greater flexibility on both repayment rates and the overall length of the loan.
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Different types of small business loans
Every small business is unique, with distinct needs and opportunities. Accordingly, there is no one-size-fits-all small business loan which is right for everyone. Small business owners should be aware of what the market has to offer as there are a variety of small business loans you can consider. Because of their size, and the perception of risk, smaller businesses often struggle to secure funding through traditional bank loans. This is especially true in more turbulent economic conditions, when banks become more cautious in their lending. In the wake of the Global Financial Crisis of 2007/8, a raft of new, alternative lenders was launched to offer financial products to businesses in need of funding. Many of the lenders use alternative means of “security” (ie the borrower’s ability to repay) and utilize advanced algorithms to offer niche lending products that are designed for specific situations.
Full article (link)
How to make a Small Business Loan Application
Securing a business loan does not need to be a long-winded, laborious process. By having some important personal and company information ready, you can fast-track the process and increase your chances of success. It’s important to note that additional requirements might apply depending on the lender and the specific loan type you require.
Most lenders will require both your personal and business credit scores, company financial information (profit and loss accounts, cash flow statements and forecasts) and information about any collateral you may have to secure against the loan. Some loan products and lenders may also require you to share a business plan and a demonstration of your industry expertise and market knowledge.
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Understanding the Pros and Cons of Small Business Loans
Small business loans may not be right for every business. The specific circumstances of each business will dictate which, if any, external funding option is best-suited to their needs.
The Pros
Speed
Many of the new entrants into the small business lending landscape can offer funds to eligible businesses in a matter of days, if not hours. Utilising technology to deliver robust and intuitive application processes, these lenders can typically grant smaller funds to businesses in a short timeframe.
Flexibility
A small business loan gives you flexibility to use the funds as you see fit, within reason. You will likely need to provide a business plan when applying for the loan, to set out how you plan to use the money, but this plan can be altered and adapted if the needs of the business change.
Fuelling growth
Borrowing money in the form of a small business loan can mean you can grow your business without needing to wait for sufficient income from sales. There may be a distinct market opportunity which you want to capitalise on now, without waiting to organically fund the investment.
No loss of control
Other forms of finance – such as equity finance – involve selling a share in your company to investors to raise funds and then having to share any future profits with those investors. A small business loan, however, does not require any loss of equity in your business. Furthermore, once a small business loan has been repaid, you’ll have no obligation to the lender.
Cons
Meeting the criteria
Depending on the lender, the eligibility criteria for taking out a small business loan can sometimes be very strict. If your business hasn’t been operating for very long, you may not have the kind of trading history a lender wants to examine. If this is the case, or if your credit rating is not as strong as it might be, you may be charged higher interest rates on the loan.
Managing repayment
A business will need to ensure it is confident of paying back the loan. Depending on the loan product, and the interest levels charged, this may be challenging. Businesses should ensure all loan repayment obligations are factored into their financial forecasting.
Getting the right amount
In some cases a lender may not approve the full amount of the loan requested. They may determine that there is too much risk in loaning the full amount. Businesses should prepare for this eventuality and set different plans based on tiered amounts of funding.
Understanding Small Business Loans
Small Business Loans – like many other types of business loan – work on the basis of a lender providing a business with a sum of money which is then paid back over time. The total amount of money the business needs to pay back (the interest rate) and the timeframe in which it is paid back will vary dependent on the lender. Some lenders will have greater flexibility on both repayment rates and the overall length of the loan.
Indeed, interest rates on UK small business loans can vary significantly. Interest rates may be fixed or variable. Fixed means that they remain the same during the course of the loan, whereas variable means the rate will adjust in line with the base rate set by the Bank of England. Most business loans charge interest as a percentage over the base rate. For example, a loan offered at 2% over base rate, when base rate is 4%, will carry a 6% interest charge.
The specific requirements of each small business will help determine which small business loan is best-suited to their needs. The type of loan (secured or unsecured), the nature of the business, how long it had been in operation for, what the loan is needed for and an applicant’s credit rating will all have a bearing on the interest rate.
Small business loans can be used for a variety of purposes – from immediate needs, to longer-term investment opportunities. Typically, loans are used for some of the following reasons:
- Managing cash flow
- Improving working capital
- Purchasing inventory
- Hiring staff
- Investing in premises
- Consolidating debts
- Investing in equipment
Different types of small business loans
Every small business is unique, with distinct needs and opportunities. Accordingly, there is no one-size-fits-all small business loan which is right for everyone. Small business owners should be aware of what the market has to offer as there are a variety of small business loans you can consider. Because of their size, and the perception of risk, smaller businesses often struggle to secure funding through traditional bank loans. This is especially true in more turbulent economic conditions, when banks become more cautious in their lending. In the wake of the Global Financial Crisis of 2007/8, a raft of new, alternative lenders was launched to offer financial products to businesses in need of funding. Many of the lenders use alternative means of “security” (ie the borrower’s ability to repay) and utilize advanced algorithms to offer niche lending products that are designed for specific situations.
Unsecured business loans
Unsecured business loans are usually smaller and more expensive in terms of fees and interest. Because the small business is providing no collateral (collateral is an item of value that a lender can seize from a borrower if he or she fails to repay a loan according to the agreed terms) the lender carries more risk. To obtain unsecured loans lenders will tend to, but not always, require borrowers to have better credit profiles.
Secured business loans
With a secured business loan, the small business will provide collateral to protect the lender from loss. This security might take the form of property, vehicles, company machinery or other tangible assets. These loans tend to be larger in size and, because of the reduced risk for the lender, tend to carry lower repayment terms (interest rates). These loans are better suited to mature businesses with tangible assets.
Merchant cash advance
A merchant cash advance (MCA) is a business funding option that ties your repayment to cash flowing into the business. As with other loans, the lump sum is issued upfront by the lender. But, unlike other loans, the repayment comes via a percentage of sales, plus fee. These types of loans are best for small businesses that accept card payments from their customers, such as retailers. You only repay the loan as more cash flows into your business. MCA loans are flexible, can be set up quickly and they provide a degree of scalability.
Invoice finance
Invoice finance utilises the security of a company’s unpaid invoices as the basis for a loan or an advance. Not technically a small business loan, the borrower receives a large percentage of each invoice as soon as it is raised, with the lender responsible for cash collection of the full amount. This type of loan is best for businesses that are trading successfully but are struggling with late payment of invoices.
How to make a Small Business Loan Application
Securing a business loan does not need to be a long-winded, laborious process. By having some important personal and company information ready, you can fast-track the process and increase your chances of success. It’s important to note that additional requirements might apply depending on the lender and the specific loan type you require.
Most lenders will require both your personal and business credit scores, company financial information (profit and loss accounts, cash flow statements and forecasts) and information about any collateral you may have to secure against the loan. Some loan products and lenders may also require you to share a business plan and a demonstration of your industry expertise and market knowledge.