For many people, a business loan can play a crucial role in turning an idea into reality.
What is a business loan?
In a nutshell, a business loan is money you borrow from a bank or financial institution · Helps you start a business · Comes with either a fixed or variable interest rate · Can be secured or unsecured
Starting a business often requires an upfront capital investment. This usually comes in the form of:
- A business loan: money borrowed from a financial lender
- Equity finance: an investment from friends, family, the government, private investors or venture capitalists
- Asset finance: used to finance the hire or purchase of equipment
Why take out a business loan?
These different financing options are used to support different aspects of the business. A business loan is often used to support working capital (or the business expenses) and can contribute to a business's goodwill - the difference between a company's total value and the value of its assets. When putting together your business plan, you need to set a budget for all predicted expenses - try our free business calculator. If you want to avoid investing all your own savings, and are unable to find other investors, a business loan is a simple way of raising the necessary capital to start your business venture. You might also choose to take out a loan, instead of getting investors, as it gives you total control over the business and its finances.
What should you consider when applying for a business loan?
Before applying for a business loan, carefully consider the following:
- Loan amount: The amount of money you borrow from the bank should be enough to cover the remaining expenses. But remember, the loan amount will be considered a liability should you apply for additional loans or credit cards
- Interest rate: Similar to other loans, you need to choose either a fixed or variable interest rate. When considering your business loan options, calculate how the different rates will impact your repayments
- Collateral: You can take out either a secured or unsecured business loan. While a secured business loan might come with a lower interest rate, you will need to offer up another asset (such as your home or another business) as security against the loan. An unsecured loan doesn't require any collateral, but you might be hit with a higher interest rate. Some lenders will also require a personal guarantee from the borrower - a legal promise that you will personally be responsible for the amount of the loan if the business is unable to repay the loan. A lender might also include a fixed or floating charge to secure a borrower's assets. This additional security allows the lender to seize any asset to repay the loan immediately if the terms of the loan are not met
- Business profits: The amount of money your business makes will impact the size of your loan. Your lender will want to ensure you can make repayments each month until the loan is paid off, so you will need to provide evidence of how much money you expect to make. New businesses will need to provide a two to three year cash flow forecast, protection and indemnity insurance, and balance sheet forecast alongside a business plan with their application. Established business will need to provide a two to three year trading history along with tax returns.
InfoChoice can compare business loans to help you find one that's suitable for your financial and business needs. If you're thinking about starting your own business, compare business loans today.