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Business Loans: Everything You Need To Know

At some point, every business needs a bit of extra cash in the bank. What better way to fund this than with a business loan? 

 

Last updated 18/04/2024

What Is a Business Loan?

A business loan is like any other loan, but one that is used specifically for business-related purposes. It's often one of the first things businesses consider when they want to raise capital. 

Loans can be taken out to pay for exciting expansion plans, to buy new stock or specialised equipment, or to help your cash flow. 

Whatever your needs, a business loan could help. 

Read on to find out everything you need to know about how they work, what types are available, and how to get one for your business. 

How Do Business Loans Work?

Like most loans, there are two key components you need to be aware of. 

The Repayment Window 

This is how long you will have to pay back the amount you have borrowed plus the accrued interest.

The longer you have to pay back the loan, the cheaper your monthly repayments will be. Although this seems like a great option at first, it will end up costing you more in the long run through interest payments. 

The Interest Rate 

Also known as the "Annual Percentage Rate" (APR), this is how much extra you will have to pay back on top of the original loan amount. This is essentially how loan companies make their money. 

Your interest rate will depend on a few things, but it can be boiled down to how much of a risk you are to the lender. 

If you have good credit and secure an asset against your loan, you will find that you have much better terms than someone with poor credit and no security. 

Interest rates also come in two different types. 

  • Fixed-rate 
    Where the APR remains fixed throughout your repayment term, So if you agree to a 5% APR it will be the same from the day you take out the loan until your final repayment.
  • Floating rate
    The APR will change, or 'float' throughout the repayment window and will often be based on the Bank of England base rates.   

To find out what your monthly repayments could be in principle, visit our free business loan calculator. 

What Types Of Business Loans Are Available?

Not all business loans are created equal. One may be more suited to your specific business needs than the other. 

We've broken down the four main types of business loans to give you a bit more understanding of which is best for you. 

Secured Business Loan 

This involves you "securing" an asset, typically a property, against the loan. If you fail to keep up with your repayments, then your asset could be repossessed to cover the cost of the loan. 

These loans are best suited to asset-heavy businesses with a proven history of trading. 

Secured loans will also typically come with more favourable terms than other loans because you are using an asset as security, making it less of a risk to the lender. 

Unsecured Business Loan 

This is the complete opposite of a secured loan, where no assets are needed as security, instead, you will have to provide a personal guarantee. 

This means that if your business fails to keep up with repayments, you will personally be responsible for paying back the loan. 

Unsecured interest rates and repayment terms will be far less favourable than with a secured loan and are best suited to fast-growing asset-light businesses. 

Working Capital Business Loan

These are perfect for short-term expenses, and the terms are often for less than 12 months. 

If you choose to opt for this, make sure you find one with a flexible or bespoke APR. 

Short-Term Business Loan

These loans are best suited to fund unexpected growth opportunities for businesses with ad-hoc payment demands. 

Repayment terms can range anywhere between 3 months and 2 years, and as a result, they will typically come with a higher fixed interest rate.

FAQs: Your Business Loan Questions Answered

For pretty much anything, so long as it has a business-related purpose, a business loan can fund it. 

A few ideas of what you could use a business loan to fund are: 

  • Expansion 
  • Purchase inventory or equipment 
  • Covering operational expenses 
  • Marketing and advertising 
  • Refinancing debt
  • Access to large amounts of capital 
  • Lower interest rates compared to other forms of finance like credit cards 
  • Interest payments are tax-deductible 
  • Flexibility 
  • Remain in control of your business 

This will depend on the lender, and if it is allowed, you may have to pay a fee to do so.