Business Loans

Business loan works just like a normal loan except that is only offered to businesses that have been trading for a few years and have good credit history.

Key Features

A business loan is one of the most effective ways of financing business objectives, such as a new venture, additional capital expenditure or even consolidating existing debts.

The types of business loan available include;

• Secured
• Unsecured
• Fixed
• Variable

Lessons learnt from the 'boom and bust' of the late 1980's has had lasting effect on the appetite of most high street banks for lending both secure and unsecured loans.

In addition, capital adequacy rules contained within the 'Basel II banking accord' have forced many lenders to thoroughly review the security of each loan on their books. As a result, many companies that are too young (under one year old), are not currently profitable or are looking for larger unsecured sums tend to be turned down by the traditional banks.

Types of Business Loan

• Invoice Finance
  • Factoring / Invoice Discounting offer suitable businesses the opportunity to draw advances against unpaid invoices
  • Invoices are often the largest assets of companies with less than £5m turnover
  • Can release significant volumes of cash on the balance sheet
  • Preferred by lenders as each invoice is actually "sold" to the lender, constituting a 'secured' loan
• Balance Sheet Funding
  • Known as asset based lending or ABL
  • The lender reviews all assets on the balance sheet and take an individual view on each one, with individual rates and loan-to-value ratios
  • Cash is then pooled together and offered as a facility to be drawn against.
  • Key to most balance sheet funding is the inclusion of invoice finance.
• Asset Finance
  • If capital expenditure is the key driver behind the cash requirement, asset financing can be the best way to acquire the asset.
  • Asset Financing often includes options to either buy, or rent the asset.
  • For certain assets such as bespoke machinery or company cars contract hire options may also provide ongoing maintenance and repair.
• Trade Finance
  • A flexible form of financing ideal when there is an initial outlay required to purchase goods, knowing that it may be some time before they can be resold and a profit realised
  • Appropriate for companies importing raw goods to be processed or purchasing wholesale with the intention to resell the goods for a mark
• Personal Loans
  • Ideal when the only route to generate the cash to start up a business is for the founder to personally borrow money which they then use to invest in the new business.
  • Possible with an equity release loan on your house or a personal unsecured loan.

Who is it for?

As loans come in many shapes, sizes and options, they can be used for many reasons however the most common uses of a business loan are:

• Investment in the business e.g. a new marketing initiative
• Capital expenditure on required assets e.g. IT equipment
• Consolidation of other commercial debt e.g. VAT or PAYE arrears
• Purchasing stock

Benefits

Things to watch out for

• You may not be accepted for a business loan if your business is young, not profitable or does not have the net worth required.
• here may be a more cost effective method of raising the cash you require: research your options and get quotes for all relevant products.
• nterest rates can be high for unsecured loans and overdrafts - shop around.

What are the next steps?

1. Compare quotes from across the market.Remember to compare the bank you have your business account with, against other high street banks and independent lenders in the sector.
2. Plan the repayment schedule and compare how each option will affect your monthly cash flows.
3. Find out if you will get a better rate if you change your business banking to a new provider.
4. Make your application for finance.
5. If you are turned down do not give up. Start the process again or turn to your backup plan you may have prepared while planning.

Frequently asked questions

The amount you can borrow will depend upon the financial state of your business and how much the business is turning over. The affordability of the repayments will also be a key factor.

Read the small print offered by each lender and ask what the acceptance criteria will be. In the UK business loans are notoriously hard to get, compared to North America where the government underwrites a large number of loans.

You will be able to work this out when you get your quote. Pay attention to whether the interest rate is fixed or variable. If it is variable you must take into account possible increases and decreases in the Bank of England base rate.

Some lenders will allow you to take pre-agreed repayment holidays during the term of the loan.

Loans can be borrowed over a time period to suit you. Longer term loans will usually cost less than short term loans.

Most lenders will allow you to spend the money however you choose with no caveats but always read the terms and conditions.

Almost all high street banks offer business loans of some sort however there are an increasing number of independent lenders that will offer alternative forms of funding.

That depends upon the terms and conditions of the loan and the security the lender has requested. In most cases the lender will take out a debenture which entitles them to make a claim against assets covered under the debenture.

As discussed above, depending upon what you need the money for, there may be other more tailored types of finance on offer. Examples ate invoice finance, asset finance, trade finance and property finance. Always research your options and rates.

Glossary

Asset based lending- is a business loan that is secured by collaterals in the form of assets, typically invoices but also other assets such as property, inventory, machinery, etc. This type of loan is typically used to meet cash flow needs of a business.

Balance sheet funding- Referred to above, this is a form of commercial lending where the lender takes a view of assets contained on a business' balance sheet and provides a facility which reflects the business' asset's value.

Business loan- a loan ideally suited for business purposes usually the business must have traded for some time and have a good credit history.

Capital adequacy- In 1988 the Basel Committee on Banking Supervision created a capital adequacy rule for banks lending to the commercial sector within the G-10 countries. In 1999 this was updated to give further protection to creditors of these banks with specific reference to the risk inherent in lending money and the cash required to be held to cover obligations in the event of a bad loan i.e. capital adequacy. Capital adequacy is expressed as holding reserves as a percentage of the outstanding loan. These percentages differ based upon the credit rating of the borrower.

Capital expenditure- Often abbreviated to "capex", this refers to a business' spending on tangible assets e.g. vehicles, machinery and IT equipment.

Cash flow- the amount of cash the business generates and spends during a period in time.

Consolidation- when referring to debts, the act of bringing together several loans by taking out a new one.

Debenture- are backed by the credit of the borrower and not a collateral. A debenture is an unsecured certificate of debt.

Factoring- factoring is a form of invoice finance which incorporates a full sales ledger management service. It is usually used by smaller companies or those companies that do not have a financial control function.

Fixed rate loan- fixed rate loans offers a constant rate that does not vary with the base rate set by the Bank of England. It offers a constant and predictable monthly cost of a loan.

High street bank- major bank organisations that offer both personal and business banking.

Independent lender- specialised lenders that are not associated with any of the major banks.

Invoice- a notification by the seller to the purchaser of the value outstanding for provided goods or services.

Invoice discounting- invoice discounting is a form of invoice finance but contrary to factoring does not offer a full sales ledger management. Invoice discounting is better suited for medium to large businesses.

Invoice finance- Invoice finance as is a form of commercial finance that allows you to raise cash against unpaid invoices still owed to you (or accounts receivable).

Leverage- the amount of debt used to finance the company's assets. Leveraged finance is most often used for investment purposes.

Net worth- The net worth of a business is a calculation of all of the tangible (and generally disposable) assets it owns, including cash, minus its liabilities.

Sales Ledger- also known as accounts receivables, is the money owed to the business.

Secure loan- a loan with assets used as collateral. A collateral is typically a property and is used to mitigate the risk of the lender.

Trade finance- can be combined with invoice finance. Trade finance allows importers credit advances for to purchase goods or services for further distribution.

Unsecured loan- a loan that does not require a collateral to secure the loan against.

Variable rate loan- a variable rate loan fluctuates with the Bank of England base rate.

• Business Finance
• Factoring
• Invoice Discounting
• Commercial Mortgages
• Buy-to-let Mortgages
• Business Loans
• Asset Finance
• Trade Finance
• Business Credit Cards

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• Instant quotes
• Free, no-obligation service
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