Business Loans Complete Guide 2017-05-31T19:27:11+00:00

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The Complete Guide to Business Loans

Last Updated 10 May 2017.
Using the index below, click on a link to scroll down to that section.

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Introduction

Business owners may need to raise money for a vast number of reasons. Whether looking to fund expansion or raise essential capital to ease cash flow, business loans can be vital for the UKs SMEs. The market for business loans is growing and with more and more lenders entering the market, things can get confusing.

Gone are the days of only having your bank to turn to. The options available when raising finance for your business are numerous. Although the choice has increased, finding the cheapest and most suitable option is more difficult than ever.

Different lenders tend to offer different products, with some focussing on start-up business loans, while another lender may specialise in fast business loans.

We’ve put together this guide to give you the information you need to make the right decision on the best funding options for your business. We will help you to understand:-

  • Where to get a business loan
  • Business loan interest rates
  • How long an application takes
  • The best funding sources

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What Is The Maximum Loan Size?

Unsecured business loans generally have a maximum loan size of £500,000. The maximum loan available for your business will depend on a number of factors, with your turnover and net profit playing a major part.

Secured business loans allow for higher loan amounts up to £1,000,000 available, or even more for the right proposition. Other forms of business funding are available which allow for almost unlimited borrowing for the right companies. If you’re looking to raise several million pounds, another product will most likely be more suitable. An experienced advisor would be able to discuss your needs and provide guidance on exactly which product that would be.

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How Long Can I Take A Business Loan Out Over?

Business loans terms vary depending on the type of product. Generally, loans for business purposes are available for terms between 1 month and 10 years. Unsecured business loans are most commonly available for terms up to 5 years. Secured loans for business purposes tend to be available for terms up to 10 years.

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What Interest Rate Will I Pay?

Interest rates are priced to risk, meaning the rate paid will be dependent on several factors. Interest rates for unsecured business loans start at 4.9% for the very lowest risk applications. In reality, most unsecured business loan interest rates will be between 8-12% per annum.

Interest rates for unsecured business loans start at 4.9%.

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Criteria

All lenders work to different criteria, so giving a set of standard terms is impossible. They do, however, tend to look at very similar factors in assessing loan amounts and pricing. The most common areas of assessment for business loans are below. We will look at each of these areas individually to highlight what information this provides to the lender.

Most lenders will take into account:-

  • Accounting information (turnover and net profit).
  • Affordability (loan amount and repayments compared to profit).
  • Bank statements and account conduct.
  • Credit history.
  • The effect of the loan on the business.

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Accounting Information

Firstly, a lender will look at turnover and profit. The turnover and net profit shown in the accounts are the main indicators of affordability of the loan you have requested. Certain lenders will make the assessment purely on the headlines of the accounts, however, most will look into the situation deeper.

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Affordability

Sometimes a business has previously struggled but is either turning around, or the cash injection will stabilise the situation. In this situation, there will be an assessment around the likelihood of the cash injection helping the business and the risk involved.

On top of this, there may be other expenses in the accounts that are no longer relevant, such as one off costs, or payments that have ceased. In this situation, certain adjustments are made to the profit to produce a more realistic figure.

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Bank Statements & Account Conduct

A lender will generally request your last 3-6 months business bank statements. By checking the statements, they will be given a good picture of the cash flow of the business. Account conduct will be an important factor here – any missed payments or returned items could count against you with certain lenders.

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Credit History

Business loan lenders will generally use your credit history as a guide to the likelihood of repaying the loan without issue. A judgment call will often be used, with adverse credit not necessarily meaning a business loan is ruled out, although it could increase the interest rate slightly.

Recent or ongoing credit problems are likely to be judged more harshly than an isolated issue or problems in the past.

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The Effect Of The Loan On The Business

On top of all of these areas, a lender will consider how the loan will affect the business. If your business needs a cash injection to fulfill a new contract that will improve cash flow, then troubles on bank statements are more likely to be overlooked.

A lender will judge an application on the situation as a whole and a problem in a single area (or even a few areas) do not mean that you are not eligible. A reputable advisor will be able to tell you quickly what options are available to you, regardless of past issues.

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Getting A Business Loan

There are several routes to securing a business loan. The first decision to make is whether you want to approach a bank, a specialist lender, or a reputable business loan broker. There are advantages to each approach. By going through your bank, they will already hold a lot of information on you, meaning you won’t have to provide it all over again. They do, however, tend to want more information and you could well end up with a process that takes longer than approaching a specialist business loan provider.

Specialist business loan lenders tend to be flexible and can move quickly. The downside is that there are so many lenders in the market, many of whom aren’t widely known, finding the right lender can be difficult. Although the application process can be swift, finding the right lender can end up being time-consuming. Of course, failure to find the best lender can prove costly, with higher interest rates the result.

A specialist business loan broker will have strong market knowledge and links to all leading providers. As such, they will be able to source the best deal for your business without the need for heavy involvement from you. The downside is that many brokers will charge a fee for their service, meaning you may save interest, but face an additional set-up cost. ABC Finance Ltd does not charge a broker fee for business loans, but get paid directly by the lender.

Overall, finding the right route for you is important. When looking at loans for business, keeping the cost down is important to ensure the loan provides the best possible boost to cash flow and the repayments remain manageable.

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What Is The Application Process?

Each lender will have a slightly different application process, and depending on how quickly you need to complete the application, this may vary slightly. Below is a breakdown of the steps involved in a successful business loan application:-

  1. Talk through your needs with an expert (either lender or reputable broker) who will talk through the loan to assess the application. They will take down the details mentioned above, such as turnover, net profit, account conduct and credit history.
  2. Assuming the application is viable, you will then receive a quote in writing detailing the interest rate, fees, and headline borrowing terms, along with what documents are required to submit a full application. The answers given in step 1 will determine which products you would qualify for and of course, which is the most suitable for you.
  3. The documents will be completed and submitted to the lender (if submitted through us, they will be submitted alongside a comprehensive report on the reasons for the loan and the positives of the application).
  4. The lender will assess the application and if happy, submit the loan to the ‘credit’. Their job is to thoroughly assess the application and if appropriate, ‘sign-off’ the loan. This stage generally takes between a couple of hours and 48 hours.
  5. Once agreed by credit, the loan offer is issued. Now it’s time for you to look over the offer, make sure you’re happy with everything, and sign and return all documents requested by the lender.
  6. Once you’ve accepted the offer, the process is complete. The funds will be sent to your account within 24-48 hours. Your new business loan is in your account and ready to benefit your business.

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What Are Unsecured Business Loans?

An unsecured business loan is a loan that is not secured against an asset or a property. The profile of the business becomes very important when a lender is lending without security. This is because, without a property or asset to fall back on, failure to keep up repayments puts the lender at a high risk of losing money.

Although the assessment is key, it also tends to be quick, as there is no need to wait for surveyors or for the lender to visit the property or view the asset. Fast business loans are important when looking to raise money urgently.

The lender will be keen to ensure the repayments are affordable. Assessments of the accounts will be very important to understand this, especially for small business loans, where the business isn’t as well established.

Although the loans are known as unsecured, the lender will look to take as much comfort from security as possible. Although there will be no charge against physical assets, the lender will most likely look to take out a debenture and/or personal guarantees. If you’re keen to avoid a certain type of security, it’s important to make this clear upfront, as different lenders will view this differently.

Unsecured business loans generally have a maximum loan size of £500,000. The maximum loan available for your business will depend on a number of factors, with your turnover and net profit playing a major part.

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What Are Secured Business Loans?

Secured loans for businesses are designed for clients who have security available to reduce the lender’s risk in lending money. The advantage of reducing the lender’s risk is that you will most likely see a reduction in your interest rate.

To take out a secured business loan, you will need to have sufficient security in the form of property or assets. Even if you already have a commercial mortgage in place on your property, you may still be able to raise the money using a second charge.

Secured business loans often offer a higher maximum loan and may even allow you to borrow over a longer term. Some lenders will offer loans up to £1,000,000 on a secured basis, or even more if there is a good business reason for doing so.

When looking for secured funding, the lender will want to look at the asset in question and will also instruct a full valuation. The valuation will come at a cost, which will have to be covered by you, the applicant.

In addition to the valuation, which can take between 1-2 weeks to complete, the legal process also has to be considered. The lender will need to take a charge on the property. If there is already a mortgage secured against it, they will need the existing lender’s consent to place a second charge against it.

Waiting for the valuation, and then waiting again for consent for the second charge can add significant time to the process.

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What Are Peer To Peer Loans?

Despite being a relatively new product, peer to peer business loans have proved to be extremely popular. The concept is that banks are bypassed, with individuals pooling their funds together to lend to a business.

Peer to peer lending is often done through a ‘platform’. These platforms are run by companies who underwrite the loan and offer guideline rates. Investors are then offered the opportunity to commit the funds needed to fund a portion of the loan.

The loans often benefit both parties, with investors increasing their returns (albeit there is more risk involved than placing the money in instant access savings accounts). Borrowers benefit through the new peer to peer lenders entering the market, offering flexible business loans.

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Quick Business Loans – When Can I Have The Money?

Different lenders take different approaches to applications and as such, a definitive time is hard to give. Generally speaking, an unsecured business loan will be completed in a week where required. Secured business loans take a little longer as a result of valuation and legal process. Secured loans for business will generally take around 4 weeks to complete. It’s worth noting that it is possible to completely slightly quicker if the surveyor and solicitor can work quickly.

There are other ways of raising finance for your business that can often be drawn down a lot quicker.

Business loans usually take around one week to draw down. It is best to talk to an experienced advisor if funds are needed more urgently than this.

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Other Sources Of Business Finance

Asset finance can be used as an alternative source of funding and is designed to help businesses raise the capital needed to purchase new assets. If your business is looking for funding to help with new equipment, vehicles or machinery, then asset finance could be the best solution.

Asset finance can also be used to release capital into the business by refinancing assets that are already owned. Asset finance generally takes around 1-2 weeks for funds to be released.

Merchant cash advances can be used to raise cash quickly. They are designed to work with businesses who take payments through a card terminal. Generally, you are able to release around 1 months turnover and repayments are collected straight from the card payments you receive. A set percentage of income from card payments is agreed upon as the basis for repayment.

Merchant cash advances can complete very quickly, with funds often released on the same day that the application is submitted. The cost of credit is agreed upfront, for instance, an advance of £10,000 may require a total repayment of £13,000. The term of repayment is not set in stone, due to a set percentage of takings being agreed upon, rather than a set monthly payment. As a result, an APR comparison against business loans is very difficult to provide.

Commercial Mortgages can also be used to release cash into a business. Commercial mortgages are usually available up to a maximum of 80% of your property’s value. Rates on commercial mortgages tend to be very low, meaning it is often the cheapest method of raising finance for a business.

The flipside to the low rates offered on commercial mortgages is that there is a lot of work to do on an application, with valuations and legal work needed. A commercial mortgage can’t generally be completed in less than 4 weeks, meaning they are often not suitable when funds are required urgently.

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Invoice Finance

Invoice Finance is an area of business borrowing that has been underutilised in recent years. It is a highly flexible form of borrowing that can be used to free up cash from your debtor book, relieving the pressure placed on your cash flow.

Invoice finance covers two specific products, invoice discounting and invoice factoring. For information on the differences between the two products read our invoice discounting vs invoice factoring article.

Invoice finance frees up cash from your debtor book by releasing a set percentage of any invoices when they are issued, rather than when they are due. This could lead to 90% of the invoice being paid on day 1 with the remainder payable on day 90 as agreed. The effect of invoice finance on cash flow can be vast, with companies able to take manage growth a lot more efficiently.

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Other Considerations

The term of borrowing on unsecured business loans can affect the interest rate. Generally speaking, if money is borrowed over a longer term, the interest rate tends to increase. Although the monthly repayments may well still be lower, the total cost of credit is likely to increase.

Ensuring the monthly repayments remain affordable is important, but the total cost of credit should not be discounted entirely.

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Conclusion

There is a lot to consider when looking to raise finance for your business and the market can appear daunting at first glance. The time between application and funds being released varies widely between different business funding products. As such, there may be a trade-off between the costs of credit and the urgency with which the funds are required.

Before deciding on whether a secured or unsecured business loan is right for you, consideration has to be made of the pros and cons of each. Secured will offer you lower interest rates but can take more time to complete and have higher out of pocket expenses (valuation and legal work). Unsecured options tend to be much quicker but will have a slightly higher interest rate.

An experienced and unbiased advisor will be able to run through you circumstances and give you all the facts you need to make the right decision for your business.

For more information on business loans, head over to our business loan product page. Alternatively, enquire online or speak to an advisor on 01922 620008.

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