We believe most small businesses don’t want to remain small, but in order to expand, cash is often required to purchase new equipment, assets or labour. Business loans can provide the necessary cash for expansion, or simply plug a temporary hole in cash flow, without the need to surrender equity.
But with a wide range of business loans on the market and, in some cases, tough criteria to meet to be eligible, we believe that gaining a wider understanding of the options available is essential.
Does your Small Business Need a Loan?
Taking out any kind of loan comes with risk attached, namely the risk that you won’t be able to keep up with repayments and jeopardise the financial health of your company. Before applying for a business loan you should consider whether borrowing money makes sense for your business.
Situations where a Business Loan might be Beneficial
- You know you can grow your revenue by purchasing additional assets (e.g. plant, equipment, new premises, stock) but lack the cash to do so.
- You know you can make the business more profitable by purchasing new assets but lack the cash to do so.
- While your business is profitable you have a shortage of working capital for carrying out the day-to-day operations of the company (e.g. paying your staff or suppliers).
We believe that it does not always make sense to borrow money to finance a business’s losses. Before borrowing money there should be a plan in place to make the company profitable, or there may be no way to repay the interest on the loan.
Providers of Loans for Small Businesses
As well as the traditional banks there are now a number of other sources of small business finance to consider before you start making loan applications. The following all provide loans to small businesses.
Bank loans for small businesses can be difficult to obtain in recent years as many banks have tightened their lending criteria.
If a bank is only partially convinced of your ability to repay a business loan they might well insist upon additional security in the form of assets (e.g. your home) or a personal guarantee to repay the debt even if the company goes bust.
Estimate of loans offered: fixed rate, variable rate, over 1 to 25 years
Peer to Peer Lenders
Funding Circle, Zopa and RateSetter are just three examples of peer to peer lending platforms which offer loans to small businesses. Peer to peer is a new kind of finance model which links investors with borrowers without the need for banks.
As such, interest rates offered on loans from peer to peer platforms are often comparable, if not cheaper, than with equivalent bank loans. Peer to peer loans are almost always unsecured. However, there are often fees attached and, because P2P platforms will likely not have the underwriting facilities that banks do, many may require a trading history of at least two years.
Estimate of loans offered: fixed rate over 6 months to 5 years
Alternative Finance Providers
Since the financial crisis many new kinds of company have entered the business lending market which was surrendered by the banks. Some of these companies, like Ortus Business Finance, offer similar loans to banks and P2P lenders, whereas others offer more exotic forms of loan.
Fleximize offers revenue finance, where repayments are made as a percentage of your future revenues, as well as flexible fixed rate loans.
The UK government funds a number of initiatives which guarantee unsecured loans made by banks or non-profit lenders to small businesses. These can help small businesses clear many of the normal hurdles to acquiring finance.
The UK government website allows businesses to search for suitable schemes, many of which are regional.
Typical Costs of Small Business Loans
The interest rates offered on small business loans vary from business to business depending on the perceived risk which the lender is taking. A number of factors feed into this perceived risk: the forecasted cashflow of the business, the business’s credit rating, whether the owner/directors guarantee the loan, whether the loan is secured on any assets etc.
How Much to Borrow?
The lenders considered above offer loans of anything from £1,000 to £1 million.
While you don’t want to burden your company with excessive debt and interest payments that will eat into your profitability, neither do you want to have to return to lenders again in the near future.
It therefore makes sense to think carefully about your borrowing needs and how they might change over the life of the loan you’re considering. Think about consulting an independent financial adviser who will be able to help you make forecasts and, if in doubt, you could opt to borrow more than you think you’ll need.