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Businesses need sufficient amount of capital to fund startup costs and operations or finance business expansions. Thus, businesses commonly take out business loans to obtain the funds they need. As with any type of loan, the company will repay the business loan with added interest and fees according to the loan’s terms and conditions.
What are Business Loans?
Business loans are obviously borrowed money intended for business purposes. Most start-up businesses use business loans to pay for their employees’ salaries and wages until their new company gets stable enough. Others would invest the borrowed money in office supplies and equipment, inventory, or new business projects.
Business loans come in several forms. They may include bank loans, microloans, mezzanine financing, business cash advances, and much more. Business loans may be either secured or unsecured.
With a secured loan, the company or the borrower puts up an asset such as building or plant, equipment, stocks or vehicles as collateral of the loan. If the loan is not repaid, the lender may claim the asset used as collateral. Unsecured loans do not require collateral, but if the company fails to repay the loan, the lender will have a general claim on the company’s assets.
If you are considering whether to take out a long-term, medium-term or short-term business loan, it will depend upon your personal circumstances and the status of your business. If you’re borrowing for a startup business, medium to long-term business loans can help offset some of the initial costs associated. It enables you to keep your monthly repayments low by spreading the cost over a longer period, usually in years or even decades.
Small businesses oftentimes opt for short-term business loans instead of long-term financing, which is also most appropriate. Most short-term business loans reach maturity in less than a year or up to three years. Short-term business loans are most suitable for business owners who are looking for immediate funding, which will be paid back over a shorter period. Moreover, short-term business loans are easier to obtain than those loans with longer terms.
Traditional bank loans are the most popular sources of funding for businesses, but securing a loan from a bank is not a breeze because of its tedious process. Microloans are smaller business loans, usually for amounts of £100,000 or less. Mezzanine finance secures a company’s business loan on its equity. The agreement allows the lender to claim part-ownership of the business if the loan is not repaid on time and in full.
There has been an increase in the number of online lenders offering small business loans, too. Nonbank lenders that offer small business loans have recently become popular alternatives to bank loans. These lenders provide fast and convenient services to business owners without requiring much of the lengthy and tedious paperwork.
Business Loans in the UK
In the United Kingdom, most businesses go to banks to take out business loans, but many nonbank lenders offer business loans as well. For a business loan, you can borrow £5,000 to £1,000,000 with a payback period of over six months to five years in both banks and private lenders. Some lenders could allow businesses to borrow as much as £5,000,000, depending on the nature and size of the business.
The bank will usually require the business to provide some security or collateral for the amount borrowed. This means that most business loans especially the large, long-term ones are secured type of credit. For a start-up business, this security often comes in the form of personal guarantees provided by the business owner himself and not the business.
Lenders typically require principals with 20% or greater ownership in the business to provide a personal guarantee. Small business lenders may waive the personal guarantee requirement if the business has strong business credit scores, income, and cash flow.
Business Loans with Guarantor
Getting business loans from your bank can be difficult if you don’t have a deposit or a residential property as security to put up against the loan amount you wish to borrow. Fortunately, there’s an option for business loans to have a guarantor. With a guarantor, you can borrow 100% of the cost without a deposit or the need for you to put up any asset as the loan security.
The guarantor can be your parents, a friend or a business partner, who will use a property they own as security for the business loan. However, for you to get an approval, you have to show that the guarantor have a legitimate interest in the business. The deal has to make sense to the bank from a business perspective. Meaning to say, the guarantor must be of relevance to your business.
If you intend to buy an existing business or start your own, you will always need to have your own funds or equity in your own property as security for the loan. In most cases, if you need a loan to fund the purchase of a commercial property, the property itself can be taken as security for the loan amount.
However, if you have a standard commercial property such as factories and warehouses, you can only use 60-70% of the property value as the loan collateral. Some specialised commercial properties such as a childcare centre will be even less value and may not even be accepted as loan collateral at all. So, ultimately, you’ll need a security for the loan and this is where a business loan guarantor can help.
However, on the downside, this is risky for the guarantor that he or she could potentially lose his or her property in the event that you default on your business loan. If the reason for your default is that the business is in financial trouble, and if the sales proceeds from the business are enough to cover the loan balance, your guarantor’s property will be safe.
Even so, you and your guarantor should be aware that the most common reason to default on business loans is that the business is unsustainable. If you have a business loan guarantor, remember that there is a possibility that their property will have to be sold to pay off the debt. However, the bank will only use portion of the funds just enough to pay off the debt. The remainder of the sales proceeds will go to your guarantor
Business loans come in a variety of forms and options to cater to any type and size of business. The best business loans depend on your personal circumstances and the status of your business. It is imperative that you understand all the options available to you and determine which one suits your needs best.
When you have full understanding of all the facts about business loans, you will know whether it is appropriate for you to get a short-term or long-term financing for your business. You may also decide whether to get it from your bank or a nonbank lending institution, online lenders or from a credit union.
It is also crucial to consider the type of business loan that would benefit your business. Since most business loans are long-term financial obligations, make sure the loan will not to lead you further into a financial disaster.
305.9% APR. £400 borrowed for 90 days.
Total amount repayable is £561.92 in 3 monthly instalments of £187.31.
Interest charged is £161.92, interest rate 161.9% (variable)
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