Businesses need finance at many stages of their development, whether they’re starting out or need additional funding.
One option for many is a business loan which can sometimes be the difference between staying in existence or having to fold.
You can get a loan from a bank or other lender, and repay it over a pre-arranged term at a fixed or variable rate.
Variable business rate loans are typically linked to the Bank of England base rate.
Some capped rate business loans are available where the rate can move up or down but cannot pass above a certain point, which gives small business protection against huge rises.
Unlike personal loans for individuals, you can sometimes negotiate the terms of a business loan, so don’t be afraid to haggle.
Many businesses are tempted to stick with their existing bank when taking out a loan but this can prove to be a big mistake as you’ll have a very narrow choice.
Instead, shop around, as the odds are, with dozens of alternative providers, you’ll be able to get a better rate.
However, if you’re applying for a loan during times of economic turmoil be warned that banks often severely restrict lending.
In fact, during the credit crunch, which began in the late noughties, the Government was forced to step in to address the severe shortage of business lending. It pledged billions of pounds to insure banks against companies missing loan payments.
You’ll need a viable business plan and a good repayment history to improve your chances of success, so ensure you prepare your paperwork well before applying. You may also need to show you have a contingency plan in case you struggle to meet payments.
When applying for a business loan, read the small print carefully before agreeing anything so you’re aware of any hidden charges such as initial fee, early repayment penalties or late payments charges.
Often, a seemingly cheap loan is suddenly not so attractive when you consider all the extra charges.
But by the same token, some deals for start-ups come with reduced fees so if you’re just getting going, they may prove attractive.
Another warning is that some loans are secured against your business’s assets or your possessions, such as your home. That means if you fall behind on payments, you could lose that asset. Therefore, ensure your lender explains the risks carefully.
An alternative to a business loan is a business overdraft. Experts say loans are normally cheaper over the long-term but overdrafts can be a useful stop-gap.
The interest rate on an overdraft is often higher than on a loan but there is rarely a charge to pay off an overdraft early so whenever possible, you can clear it.
That means it can be useful in the short-term given the flexibility that can be lacking in a business loan, where you normally pay a fee to repay before your term is up.