A Guide to Getting a Small Business Loan

Most businesses, large or small, are likely to need funding at some point in their life cycle. Sometimes you may need a quick injection of cash to solve temporary cash flow problems, others a longer-term funding solution to help you realize your ambitious growth plans.

You can use a small business loan to fund:

  • Hire more staff
  • Purchase of equipment
  • Invest in stocks
  • Decide on important expenses
  • Easing of cash flow problems

With so many lenders in the market today, from banks to alternative lenders offering innovative business loan solutions, there is a business loan option for almost every SMB.

You may even be eligible for a small business loan if you’ve been in trading for less than two years, have relatively low sales, or have imperfect credit ratings.

Regardless of your circumstances, this simple guide to getting a small business loan is meant to cover the basics of what you need to know. Let’s start with a definition.

What is a Small Business Loan?

A small business loan provides startups and SMBs with the funding they need to be successful. With a term loan, the business owner borrows money from the lender and agrees to repay it in monthly repayments over a specified period of time, along with any interest.

However, it doesn’t always work that way.

For example, when you take out a merchant cash advance, you pay what you owe through a percentage of your loyalty card transactions. Instead of paying a set amount each month, the amount you pay back depends on how much trade your company does.

All small business loans are either secured or unsecured. Secured loans are secured by an asset such as your premises, machines or vehicles.

If you fail to repay the loan, the lender can take possession of the asset. This makes the loan less “risky” in the eyes of the lender.

Unsecured loans are the opposite of this in the sense that they do not require any collateral. However, some lenders still require a personal guarantee or a director’s guarantee, which means you may still be personally liable.

With an unsecured loan, the lender will carefully examine your trading history and creditworthiness when making a decision. Unsecured loans may have higher interest rates due to the higher risk. Secured or unsecured, the borrower is always 100% liable for the debt.

Types of Small Business Loans

There are many different types of small business loans in the market today. Facilities that are flexible and designed for specific purposes and circumstances.

While red tape and lengthy processes can make it difficult to obtain a business loan from a traditional lender, it is comparatively easier to obtain funding from an alternative lender. Approval is often quick and you might even get a decision shortly after you apply.

Depending on how much you need to borrow and what your company’s current financial situation is, you can get a loan of between £ 1,000 and £ 15 million. You should only commit to a loan if you have a viable repayment plan (plus the interest).

When calculating the total cost of a loan, consider fees as well. The interest rate you pay depends on a number of factors including, but not limited to, the lender and the type of loan, the repayment period, and the profitability of your business.

Most small business loans have a fixed interest rate, which means that you pay the same interest rate on your debt every time. Floating rates can go up and down.

Let’s look at some of the types of small business loans out there today.

CBILS loan

If the coronavirus pandemic has affected your business, you may be eligible for a CBILS loan. There are no lender fees and the government will make a payment to cover your first 12 months of interest payments.

The program ends on March 31, 2021, so don’t hesitate if you want to apply. CBILS loans are available in the form of fixed-term loans, invoice finance, asset finance, and bank overdrafts.

Dealer prepayment

A flexible way of financing small businesses. The lender transfers the amount to you and you pay it back using a percentage of your total card sales. How much the lender is willing to lend depends on how much you are making from customer sales, as well as other factors.

Term loan

In general, a term loan is a type of secured or unsecured financing that requires you to repay your debt in monthly installments over an agreed period of time.

Revolving Credit Facilities

This is a flexible type of working capital financing that is often a good alternative to overdrafts. It’s a type of facility that allows you to use it when you need it and only pay interest when funds are used. It is one of many flexible financing solutions in the alternative finance market today.

Invoice financing

Invoice financing is aimed at SMEs that invoice customers or customers. It is usually used with the aim of solving cash flow problems. The lender increases the value of your bills for a fee so you can get the money you owe faster.

Bridging loan

A short-term type of finance that can get your business from A to B until it can pay back the loan or secure longer-term finance. Bridging loans are popular with real estate companies, but can be used by a wide variety of companies, including startups.

Business credit card

The added benefit of a business credit card is that, if used wisely, it can help you build positive business credit. Corporate credit cards give you ad hoc access to cash and can make it easier to manage expenses.

How To Apply For A Small Business Loan

Before you begin your search, get a clear picture of the following:

  • What will you use the funding for?
  • How soon do you want to pay it back
  • How much interest you are willing or able to afford
  • Whether or not you want to offer a personal guarantee
  • How to repay the loan (for a bridging loan, this is your “exit strategy”)

With so many business financing options available, it can be difficult to know where to start. Financing options have been selected by the state-owned British Business Bank as a platform for financing businesses.

We can compare over 120 lenders to find the right one for you, explain interest rates and fees, and help you navigate the application process.

See what you might be eligible for here.

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