If you’re considering taking out a business loan, there are many things you have to think about.
The UK business loan market includes a wide range of vendors offering different types of commercial loans. These types of business loans are directed to a particular type of business, or companies of a certain size or those that operate in a specific sector.
With a wide range of available business loans it is important to first get a basic understanding of the different options you have when you borrow money to finance your business.
The key considerations that you need to keep in mind when buying a business loan for your company, we detail some
Basic criteria for business loans
Very apart from the business loan provider you are going to take, there are some basic loan criteria that almost everyone will see, so it makes sense to be prepared for the common questions.
One of the questions will be: ‘ How long have you been trading the business? ‘, and lenders will usually want to see a minimum of 1 – 2 years of history.
If your business is younger than this, there are still some options out there, such as start-up loans or government subsidies.
The following important metrics are your annual turnover and profit margins. These are the most basic health indicators of your company, which not only demonstrate your ability to generate cash, but also report your affordability to pay a loan.
Along the same lines, it is a common practice to compare the proportion of the loan amount to your monthly billing. The standard maximum is a 1:1 relationship, that is, normally you can not borrow much more than one month of typical billing.
Finally, most lenders will look at their credit history (business, personal or both) to check for serious problems such as CCJs and other potential red flags such as repeated late payments.
Since the lender will be based on a monthly payment from you, it makes sense that you want to see what your past record is like.
If your business satisfies these initial eligibility checks, from now on there are some things to consider to choose the most suitable type of business loan and the right lender for your situation.
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What types of insurance should your business have?
The concept of security is important in many types of business financing, and it is one of the things that you should think about when you are looking for a loan.
On one side of the coin are secured loans. As its name implies, these business loans are “insured” in valuable assets owned by your business, such as commercial property, machinery, vehicles and stock.
The basic idea is that the lender takes a legal obligation on the asset (s), so if you stop making the loan refunds the lender can sell the asset (s) that you have provided as security to recover your losses.
It is important to know that for this reason, the resale value of the security determines how much you can borrow. With proper security, you may be able to borrow up to 75% of the value, and going the secured route can also mitigate the risk in other areas of the application.
For example, if you wanted to borrow £ 10,000 but it was only becoming more than £ 5,000 per month, the lender would probably question your affordability, because the proportion of the loan amount to the turnover is higher than you feel comfortable.
However, if you had a piece of machinery worth £ 15,000 to use as security, this could make the difference between a ‘ no ‘ and a ‘ yes ‘.
On the opposite side are unsecured loans, which imply no security and therefore require companies that are stronger in terms of billing and profitability.
Those lenders who offer unsecured business loans will do so because they want to see good profits and a few years of commercial history, and will usually ask for a personal guarantee, which brings the personal net worth of the business manager at stake.
Commercial loans to usually have a fixed term and payments are fixed monthly, but in the event that your business is not easy to predict, you may prefer a flexible option.
Today, there are many business loan providers that offer revolving credit facilities, which are characterized by a maximum of overdraft style that allows you to borrow when you need.
Usually, apart from installation fees that only pay interest in what is exceptional, so the line of credit can stay idle when you don’t need it. Having this type of safety net in place can be very useful for companies that are variable month to month.
Characteristics of your company
Finally, it is worth thinking about what types of loans are best suited to your business in terms of how you trade. For example, if you trade with customers on credit and receive payments through bills in terms of payment, the financing of bills helps you access this money soon.
Or perhaps you make most of your income from the card machine payments — in which case, it would make sense to investigate the advancements of merchant cash, which are a kind of unsafe line of financing based on your card history.
There are also lenders who specialize in particular sectors such as construction or recruitment-while they are by no means the only options available, you might find your product include something that separates them from the package.
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Choosing a business loan is more complicated than you might think. is a fixed-term loan or a flexible installation better? Are you safe or looking for an unsafe option?
Answering questions like these will help reduce your options and put you on the right track.
For a more detailed guide to the pros and cons of various types of business loans have a look at the 2017 Business Loan Guide, which is free to download.
A business finance market as financing options – which has been selected by HM Treasury as part of the bank reference scheme – could help you find the right business loan.