A guide to getting a small business loan

Simon Curteon of Funding Options explains what small business loans are and what types of loan are available for your business

Most companies, large or small, are likely to require funding at some point in their lifecycle. At times, you may need a quick cash injection to ease temporary cash flow issues, at others, a longer-term finance solution to set your ambitious growth plans into action.

You can use a small business loan to fund:

  • Hiring more staff
  • Purchasing equipment
  • Investing in stock
  • Paying for crucial expenses
  • Easing cash flow issues

With so many lenders on the market today from high-street banks to alternative lenders, offering innovative business loan solutions, there’s a business loan option out there for almost every SME.

You might even be eligible for a small business loan if you’ve been trading for less than two years, have a relatively low turnover or a less-than-perfect credit history.

Whatever your circumstances are, this simple guide to getting a small business loan is designed 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 SMEs with the finance they need to succeed. With a term loan, the business owner borrows money from the lender and agrees to pay it back, alongside any interest, over a set period of time in monthly repayments.

It doesn’t always work like that, however.

For instance, if you take out a merchant cash advance, you pay what you owe through a percentage of your customer card transactions. So instead of paying a set amount each month, the amount you pay back depends on how much trade your business is doing.

All small business loans are either secured or unsecured. Secured loans are backed by a business asset such as your premises, machinery or vehicles.

If you don’t 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 don’t require security. Some lenders, however, will still ask for a personal or ‘director’s’ guarantee, which means you may still be personally liable.

With an unsecured loan, the lender will look closely at your trading history and credit score when making a decision. Because there’s more perceived risk, unsecured loans can have higher interest rates. Secured or unsecured, the borrower is always 100% liable for the debt.

Types of small business loan

There are lots of different small business loan types on the market today; facilities that are flexible and designed with specific purposes and circumstances in mind.

While it can be difficult to get a business loan from a traditional high street lender due to red tape and lengthy processes, getting finance from an alternative lender is comparatively easier. Approval is often quick and you may even receive a decision shortly after applying.

Depending on how much you need to borrow and your business’ current financial footing, you could be eligible for a loan of anywhere between £1,000 and £15M+. You should only commit to a loan if you have a viable plan for how you’ll pay it back (plus the interest).

When working out the overall cost of a loan, be sure to factor in fees as well. The interest rate you pay will depend on a number of factors, including (but not limited to) the lender and type of loan, the repayment term and your business’ profitability.

Most small business loans come with a fixed interest rate, meaning you’ll pay the same rate of interest on what you owe each time. Variable interest rates can go up and down.

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

CBILS loan

If your business has been adversely affected by the coronavirus pandemic, you may be eligible for a CBILS loan. You won’t have to pay any lender-levied fees and the Government makes a payment to cover your first 12 months of interest payments.

The scheme is due to end on 31 March 2021 so don’t delay if you want to apply. CBILS loans come in the form of term loans, invoice finance, asset finance and invoice overdrafts.

Merchant cash advance

A flexible type of small business finance. The lender advances you the sum and you repay it back via a percentage of your overall card sales. How much the lender is willing to lend will depend on how much you make through customer sales, as well as other factors.

Term loan

Broadly speaking, a term loan is a type of secured or unsecured finance that requires you to pay back what you owe in monthly instalments over an agreed period of time.

Revolving credit facilities

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

Invoice finance

Invoice finance is designed for SMEs that invoice customers or clients. It’s usually leveraged with the goal of easing cash flow issues. The lender advances the value of your invoices for a fee so that you can receive the cash owed to you quicker.

Bridging loan

A short-term finance type designed to get your company from A to B until it can pay off the loan or secure longer-term finance. Bridging loans are popular with businesses operating in the property industry but can be used by a variety of businesses, including startups.

Business credit card

The added benefit of having a business credit card is that, if used wisely, it can help you build up a positive business credit rating. Company credit cards provide you with ad hoc access to cash and can simplify the process of managing expenses.

How to apply for small business loan

Before you start your search, build a clear picture of the following:

  • What you’re going to use the finance for
  • How quickly you want to pay it back
  • How much interest you’re willing or can afford to pay
  • Whether or not you want to offer a personal guarantee
  • How you’re going to pay the loan back (for a bridging loan, this is your ‘exit strategy’)

With so many business finance options out there, it can be difficult to know where to start. Funding Options has been chosen by the government-owned British Business Bank as a designated platform to find finance for 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 could be eligible for here.

Read more

The benefits ofapplying for a second CBILS loan

Related Topics

Small Business Loans