A business loan is a lending agreement between a business owner and a lender (a bank or a private lender) by which the business owner borrows money.
Business loans are a way for business owners to borrow money, whether it is to fund their operations or to get themselves started. Whatever they require the capital for, business loans are a way for them to receive funds from banks or lenders in advance. Importantly, business loans are not as closely regulated by the FCA as other loans like personal loan and mortgages.
How Do Business Loans Work?
Between the lender and the borrower, there will be an agreed-upon repayment schedule, with interest. Before entering the loan agreement, both parties will agree on a realistic repayment plan including how much will be borrowed and how much will be paid back over time, and for how long. The amount of interest will also be pre-agreed.
The exact loan agreement will depend on both the lender and the borrower. There may be certain factors that come into play such as the amount of time the business has been running, whether or not it has any collateral to put forward as security and the current financial health of the company. Lenders will probably want to know the purpose of the borrowed money and may request certain information and metrics from the business owners.
As with any loan, business loans are a way to borrow money that you don’t currently have, to be paid back in the future. The only difference is that business loans are specifically designed for commercial organisation rather than individuals. Thus, unlike getting a payday loan in the UK, or any other loan for that matter, when you take out a business loan, the agreement is between the lender and your company.
With business loans, business owners could borrow anywhere between £1,000 and £15 million and pay the loan back from anywhere between one month to 25 years. The exact conditions of loan will vary depending on the lender, the business, and the purpose of the loan.
What Types of Business Loans Are There?
There are many different types of business loans available, varying from the broad to the very specific, with some lenders specialising in particular businesses. Generally speaking, all business loans will fall into two categories: unsecured and secured.
Unsecured loans allow your business to borrow money without the need to use any business assets as security. Secured loans, on the other hand, require a business to use an asset as security. In the case that the loan is not repaid, lenders can sell the collateral to cover their losses and recuperate their money. Secured loans tend to have lower interest rates and could be better for borrowing larger amounts of money.
When it comes to types of business loans, there are many different types available depending on your business sector and the purpose of your loan. Here are some of the most common types of business loans:
Bank Loans –
This is a business loan offered by a bank or building society. Your business will borrow a lump sum of money up front and pay this back over a fixed period of time with interest. Most bank loans will need a director’s guarantee – this says that if the business is unable to repay, the business director will be personally liable for the debt.
If you already have an existing individual bank account with the bank, and have a good credit rating, you may be able to qualify for favourable rates for a business loan with the same bank.
Peer to Peer Loans –
This is a way to borrow money from private investors via online lending platforms and these types of loans often come in the form of short term personal loans. These investors will want a return on their investment. Like bank loans, these lenders may ask for a director’s guarantee.
Revolving Credit Facilities –
Business credit facilities will let you borrow money as and when your business requires. Through this agreement, you will only pay interest on the money you withdraw and can repay the money when you have the funds available.