The ABCs of Business Financing: Business Loans Explained

Businesses in the UK are plentiful, from small, friendly neighbourhood enterprises to big, multinational corporations run by boards. And despite the distinct challenges of owning a business, more and more individuals are taking to starting their own enterprise for the simple reason that it can give them a great return on their investment if the business is successful.

If you have a business of your own, however, you know that it can be difficult to come up with the funds you need – whether it’s for payments for suppliers or for investing in certain assets that will allow your business to grow, such as a new business location or new equipment. At times like these, you may be considering acquiring a loan. But before you do so, below are the ABCs of business loans and what you need to know.

What is a business loan?

Simply put, a loan is an amount of money which you borrow and then repay over an agreed period of time. You can usually acquire a loan for your business from different entities, such as private and alternative lenders (banks and other private financing institutions), other business enterprises, and even your family and friends.

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What you need to know about a loan’s interest rate

But aside from paying back the exact amount of money you have borrowed, you usually have to pay interest on the loan as well. The amount of interest on the loan depends on several factors, such as how long the loan is needed, how much you have borrowed, and whether you have acquired a ‘secure’ loan, meaning you have provided collateral such as your home or other assets. Another factor that affects the rate of interest for a business loan is the base rate of the Bank of England.

Apart from this, there are two types of interest rates you can expect from a business loan: fixed or variable. A fixed interest rate will not change during the entire duration of the loan, whilst a variable interest rate will change depending on the base rate of the Bank of England or the bank’s borrowing cost.

When should you apply for a loan?

Of course, the main reason we all apply for a loan, especially if it is for our business, is to acquire more money. But in general, the money that is received from a loan is used for such expenses as payment for assets, such as company vehicles, computers and other office equipment, or machinery. Additionally, loans are often used for businesses which are just starting out (as capital), and in special circumstances where the amount of money needed will not change.

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It is generally not a wise idea to take out a business loan for ongoing or operational, day-to-day expenses, as you may have a difficult time keeping up with the payments.

What to remember before applying for a loan

If you are considering a loan for your business, your first option may be to go to a bank. However, this can be difficult, especially when you are a start-up enterprise. Banks usually have strict and stringent rules and regulations on who gets approved for a loan, and they often require a business to have had a long trading history before the business applies for a loan. One alternative, however, is to apply for business loans from a specialist lending firm which often offers fixed fees with no APR and only requires a short trading history for a business to be approved.

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