Overview of Business Loans

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Business loans provide one of the principal motors for the day to day success and operation of many small to medium sized enterprises in the UK.

Indeed, an estimated 50% of all such companies have sought business loans of one form or another within the last year or so of their activities, says the publicly-backed British Business Bank.

Sources of finance

Business loans provide companies with a form of debt finance, explains a Business Finance Guide published by the Institute of Chartered Accountants in England and Wales (ICAEW) – and debt finance is probably the most readily accessible and straightforward source of external funding.

The other principal type of funding is equity finance – the means by which investors make funds available to the company in return for a share in its ownership. Along with that ownership, however, may come other strings, such as a say in the decision-making and running of the business itself.

Debt finance

Additional funding through borrowing may be required for any number of reasons.

Just a few of these might include the need to increase the company’s availability of working capital, to meet shortfalls in immediate or longer-term cashflow projections, to acquire new assets – such as plant, machinery or premises – to fund the acquisition of rival companies, or to launch new marketing campaigns.

That borrowing may take one of two principal forms:

Secured loans

  • The security referred to in this description comes in the shape of company assets or those owned by its directors personally;
  • these assets are at risk if the company defaults on repayment of the loan;
  • the risk, the administrative complexity in setting up the necessary security and the need to find willing lenders, all mean that secured loans may take some time to obtain – and, therefore, may not be suitable for meeting your immediate need for external funding;

Unsecured loans

  • an unsecured loan, on the other hand, carries no such risks to the assets of the company – although any serious default on repayments may affect its credit status and therefore make subsequent borrowing more difficult;
  • unsecured loans are also typically much shorter in length – usually between 6 and 12 months – with a repayment term that avoids the accumulation of longer-term interest charges;
  • some lenders may offer a single, fixed sum representing the total cost of your credit, making control and management of the impact of repayments on your company’s cashflow that much easier;
  • in addition to the borrowing being short-term, the typically company also tries to limit the size of such business loans– the less that is borrowed, of course, the cheaper the cost of credit;
  • although sums of between £5,000 and £100,000 may be available, therefore, most such business loans tend to be for less than £50,000;
  • the speed of delivery of short-term business loansis normally essential in meeting the needs of a fast-changing business environment – so application processes are typically streamlined;
  • you are likely to be looking for an approval in principle more or less immediately and, after consideration of your formal application and pending its approval, you probably need the funds available within 48 hours or so.

When looking to debt finance to raise the funds you may need, therefore, the choice is between secured and unsecured borrowing. Of these, unsecured business loans may offer the more simple and straightforward solution, without putting the company’s assets at risk, and delivering the required funds within a matter of days.