An Introduction to Business Loans
When it comes to securing a business loan, your options are seemingly endless. Not only are there a wide variety of products out there, there are also a huge range of lenders offering these loans, from well-known high street banks, through to specialist independent lenders. However, the good news is that regardless of the size or financial position of your business, chances are there is a loan out there which meets your needs.
Your first step is to decide exactly what it is you are looking for. What may be suitable for a well-established company needing a large amount of money to fund an ambitious growth project, will be completely different to that required by a start-up looking for finance to purchase stock.
With that in mind, you should know how much money you will be looking to borrow, how much you can afford to repay on a monthly basis, and how long you will need the loan to run for. Once you are clear on these factors, you can start narrowing down the field.
The Different Types of Loans
- Secured loans – With a secured loan you put up collateral to underpin the borrowing. Essentially this means that should you default on your repayments; the lender can seize the asset you have put up as security, and use the proceeds of this to cover the balance of the loan. As the lender has this security, you may find it easier to obtain a loan and it is often the case that the interest rate offered is more competitive than you would be able to obtain on an unsecured loan where the risk to the lender is substantially greater.
- Unsecured loans – With an unsecured loan, you borrow money and sign a contract promising to pay this back through a series of monthly instalments. Should you default on the loan, the lender is not able to sequester your property or assets as recompense for the missed payments. This adds a considerable element of risk to the lender. As already mentioned, the lender often chooses to level a higher rate of interest on the loaned amount as a result.
Should the lender have genuine concerns that you may struggle to repay the money you have lent, perhaps due to previous bad credit or because your business is a new venture, they could ask you to sign a personal guarantee (PG) to reduce the risk on their side. See the section on PGs below for more information.
- Short-term loans – It may be the case that you need to borrow money only for the short-term. it could be that you know you will be coming into an amount of money in the near future with which you will be able to pay off the loan, or perhaps you only need to obtain a relatively small amount of funding which you will easily be able to clear in a couple of years. If this is the case there are specialised loans out there designed exactly for this purpose. A short-term loan is usually defined as borrowing with a term of less than two years.
Personal Guarantees (PGs)
When lending money, banks and other financial establishments, like to know that their money is safe and will therefore take all the precautions they can to ensure they will not be left out of pocket when lending money. This is why banks prefer secured loans, which give them a tangible asset that they can take control of and sell in the event of non-payment.
However, not every company has unencumbered property or assets that they can put up as collateral. In these instances a lender may ask you to sign what is known as a personal guarantee. In its simplest form, a PG is an agreement which states that should your business fail or be unable to repay the money it has borrowed, you as an individual will then be responsible for paying back this money from your own personal finances.
In the event of a limited company entering into insolvency proceedings, any debt owned by the company will be written off as part of the liquidation. However, if a personal guarantee has been signed for any of the debt, this limited liability does not apply and the loan still needs to be repaid.
Giving a personal guarantee is a huge step to take and you should consider the implications of this thoroughly before signing one. PGs can have disastrous consequences on your own personal financial situation should your business encounter difficulties; you should seek expert advice and guidance before committing.
Consider Your Lender
It may be the case that you are so focused on securing a loan that you don’t give much thought to the lender itself. After all, the money is the same no matter who lends it to you, right? While this may be true, taking the time to ensure you are approaching the right lender could save you considerable time and effort in the long-run.
Your first port of call may be a high street bank. A loan from a mainstream bank is typically the cheapest option due to the relatively low rates of interest they charge, however, depending on your business and its current financial situation you may find it difficult to be accepted. The application process is rigorous, and you should expect to be able to demonstrate solid financials backed up with a strong business plan for the future plus a lengthy and successful trading history. Obviously this is not going to be possible for every business, particularly those which are newly established. Luckily there are alternative providers out there.
Challenger banks are typically more lenient with their lending criteria, although the application process is still tough and the interest rates on offer may be higher than from high street lenders. Another option is to consider a specialist lender who may be able to accommodate your needs better. Depending on the industry you operate in, you may be able to find a lender who specialises in finance options to your sector. These providers will understand the challenges businesses in your industry face and will usually be more sympathetic when analysing your financials. The application process is much swifter with many specialist lenders now in the position to approve your loan and transfer the money within a matter of days.
With the array of loans on the market it is prudent to obtain expert advice before going ahead. BTG has many years of experience when it comes to commercial borrowing, and can help you understand your options and ensure you are making the right decision for you and your business.