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Scaling-up a business usually requires a significant amount of capital, and for many small businesses, speed and agility are paramount. When waiting around for capital to become available isn’t an option, many businesses will look to a business loan.
Spreading the repayment of a business loan over a lengthy period allows you to keep monthly repayments affordable, but generally speaking, the longer you borrow for, the greater the overall cost of borrowing. From a lender’s point of view, a longer loan term means a greater opportunity for your business to have a lean period in which it might struggle to make a repayment. So for this reason, you’ll need to show a reasonable history of financial stability in order to get approved. If you’ve only been trading for six months, don’t expect instant approval on a five-year loan.
When borrowing for a number of years, the interest you’ll pay will be substantial, so it’s worth shopping around for the best deal you can get. Here’s how to find the right type of finance, how to apply and some important hurdles to watch out for.
It’s generally possible to apply for a business loan online in a matter of minutes. As well as providing details to identify your business, (company type, registered address, limited company number etc), you’ll normally need to submit VAT returns and bank statements. You’ll also be asked how you’re planning to spend the loan.
Sometimes, you’ll be given an instant decision on your application, but naturally, for larger sums and longer terms or in situations where there’s a greater perceived risk, lenders are likely to want to take a closer look at your business. In these cases, getting a decision might take a couple of working days, and might require a discussion with an underwriter. Once approved, you can often expect to have your funds credited on the same business day.
In some cases a personal guarantee will be required – that’s when an individual promises that, if it came down to it, they would use their own money/assets to repay the loan. Alternatively lenders may require a loan to be secured on business assets, such as property, vehicles or equipment.
Most medium to long term business loans come with a fixed interest rate. That means the rate will stay the same for the duration of the loan and you’ll know in advance exactly how much the loan will cost each month and overall, which is particularly handy when planning budgets. Always check if the loan you’re considering comes with a fixed or variable rate attached.
Variable rates can sometimes be more competitive but typically fluctuate with general shifts in the economy. If the Bank of England Base Rate increases or decreases, variable interest rates typically follow suit. However, this is always at the lenders’ discretion.
Don’t forget that rates are almost always tailored to the company. That means that if the lender thinks your business is a pretty safe prospect for lending to, chances are it will offer you the advertised representative APR. If it deems the loan to be more risky, you will likely be offered a “personalised” (higher) rate. Lenders are obliged to offer the advertised representative APR to 51% of borrowers.
Consider the following key factors when weighing up multiple lenders:
Yes, businesses have credit scores too, and lenders will use these to assess the chances of getting their money back.
Your business credit score is calculated by credit reference agencies based on information in your business credit file. This includes your borrowing history, previous credit applications, current debt, debt payment history and the number of years the company has been in business.
There are a number of credit reference agencies in the UK, and each will use a different algorithm to calculate a credit score for your business. Lenders use the information in your credit file in conjunction with their own affordability and risk assessments when weighing up your application.
Since the success of your application may depend on which credit reference agency your lender uses, plus the peculiarities of their internal checks, it’s sometimes worth applying to a different lender if your initial application is rejected. Just remember that each application for credit will involve a full credit search and will have a small (and usually short-lived) effect on your credit score, so don’t apply for too many in a short space of time.
To maintain a healthy business credit score:
There are many different types of business finance available. The best option for you will depend on the current financial position of your business and what you’re aiming to achieve in the future. If you’re looking to fund a one-off purchase, a traditional business loan could be the way to go. If you’re hoping to cover fluctuating day-to-day expenses, there might be a better option.
In all cases, the lender will consider your business credit score, annual turnover and how long you’ve been in business during the approval process. In many cases, it will display minimum eligibility criteria for all three of these factors.
This type of loan arrives in one lump sum, which you’ll be expected to pay back over a set period of time with interest and fees. Loans with a term of less than two years are considered short term, while those with a term of five years are typically dubbed long term loans.
Invoice factoring is the process of selling unpaid invoices to a lender for a percentage of their value. The lender will pay this percentage to you upfront.
This option can be taken out on a monthly basis to improve cashflow, or once to cover a one-off payment. You can choose to factor all of your business’s invoices or just a selection.
This option also gives you an advance on your invoices. Essentially, it’s a loan using your company’s invoices as collateral. You’ll get a percentage of your invoice’s value upfront, which you pay back with interest and fees. Once the creditors pay you, you repay your lender.
A line of credit provides your business with ongoing instant access to a certain amount of funds, as and when you need it. Similar to a business credit card, you can withdraw whatever you need and pay interest only on what you borrow.
This option is particularly useful to assist seasonal businesses with cashflow during slow periods.
It often comes with annual fees and minimum payment obligations (either weekly or monthly), but you can typically keep your line of credit open for as long as you wish.
Although medium to long term loans are a big commitment, they can be a fantastic tool to grow your business. The key is to find the best deal and spend the money intelligently.
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