If you are starting a business and need some cash to begin growing your company, some of the most common money – raising methods are angel investors, crowdfunding or even using credit cards to fulfil your business needs. However, when it comes to larger spending, this is where business loans come in.
Business loans, in simple terms, is a certain amount of money offered to a business when they may need a little cash flow support. Businesses can access various types of loans, and will usually agree specific repayment terms and interest rates prior to having full access to the funds.
In most cases, a business loan can be used for anything related to that business, but certain loans have more restrictions. For example, loans can help start new projects, pay outstanding bills, hire new staff, purchase new equipment and much more.
Loans, explained
The most common types of loans are unsecured and secured business loans. Unsecured loans are usually loans under £500,000 over a maximum of five years. This type of loan does not usually require businesses to secure their commercial or residential properties, although some lenders may ask for a personal guarantee instead.
Secured business loans usually require applicants to put their commercial or private properties up for collateral. Typical secured business loans go up to £2 million, but this usually depends on the value of the applicant’s assets.
Essentially, the more equity you have in assets, the more you will be able to borrow from companies that offer equity financing loans. Semi-commercial properties and B2L properties can also be used as collateral.
Other types of loans include asset finance, merchant cash advance, revolving credit, invoice finance and bridging loans, which you can learn more about here.
Convenient and flexible
There can be different immediate benefits to securing a loan, for example, once the application and approval process is finalised, securing and receiving the loan can be quite a fast process.
Secondly, businesses have a lot of flexibility in terms of how their loans can be spent. Lenders, mainly banks, do not usually care about this, but what they do care about is if you are paying your loan back in time.
Business loans or investors
Although business loans and investors can both result in the financial support your business needs, the key difference between getting an investor on board or securing a loan is that investors usually expect a return on their investment.
In this case, investors usually expect a share in the business. However, with business loans, you simply pay a fixed amount plus interest back to the lender.
Interest rates
Due to the length and amount of business loans, the interest rates of these loans have quite reasonable interest rates, in comparison to other types of personal loans.
Although this does depend on where you get your loan from as there is a lot of competition within the small business loans market, therefore lenders are doing what they can to attract and keep customers.
Increase businesses working capital support
As the title suggests, companies are able to use their loan money to actually increase working capital by helping you to run your daily operations and cover your expenses, without having to dive into emergency funds. This can come in especially handy if businesses are going through liquidity issues.
Boost your business credit score
However, these benefits go beyond the daily use of loans and business growth. Securing a business loan, and making timely payments can show banks and lenders that your business is trustworthy and is financially stable.
This can in turn help you increase your business credit score, thus, allowing you to receive lower loan interest rates in the future.
To conclude, business loans can help in many ways, but prior to starting your loan journey, be sure that you have a repayment plan in place. Doing so will not only make future borrowing cheaper, but also ensure your interest rates do not increase in the future.
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