How Do Business Loans Work?

There are many reasons that a business may need to raise extra capital. Usually, these extra funds are used as an investment to expand and grow the business to increase profits.

The issue for many businesses is that there is a seemingly endless amount of options available when it comes to business finance. In this guide, we’ll talk you through how each one works and help you decide which type of business loan will best suit your situation.

What is a Business Loan?

A business loan is just that, a loan specifically designed for businesses. Typically, a person or individual would not be eligible for one as the terms and conditions are quite different from those that come with personal loans.

Crucially, with a business loan, you can borrow anywhere between £1,000 and £3 million, depending on the size of your business. Repayment periods are between 3 months and 5 years.

Despite there being many different types of business loans, ultimately they fall into two separate categories:

Secured Business Loans

Secured loans allow your business to borrow money against assets. This means that if the loan repayments are not met, your assets can be seized and used as repayment.

Unsecured Business Loans

Unlike secured loans, an unsecured loan lets you borrow money without having to secure it against any company assets.

Business assets are anything that your company owns outright which are used for business purposes. These could be almost anything but some of the most common examples are stock, machinery and property. All of these can be used as collateral to secure a loan if needed. If this is the case then a representative from the finance company will be able to value your assets before approving your loan.

 

What Can You Use Business Loans For?

Business loans are great in that you typically do not have to specify what the fund will be used for. Some of the most common uses for new business finance include:

• Acquiring new stock
• Hiring more staff
• Moving location 
• Expanding current premises 
• Upgrading current or buying new equipment and machinery
• Paying off existing debts 

Business loans provide a great way in which companies can expand when the need arises but also offer the ability to stabilise operations due to unforeseen circumstances.

 

What Types of Businesses Can Get Loans?  

Almost all businesses will be able to access business finance in one way or another. There are many financial products available with each having a very specific set of criteria aimed at different business sizes. 

Cash loans come with minimum trading requirements and require applicants to demonstrate that they have been trading for a certain length of time.

There is also no limit to the number of loans that a business has. They must, however, be able to demonstrate the ability to pay each one back.

 

The Different Types of Business Loan

As we have mentioned, there are many different types of business loan available. Depending on the size of your business and the sector in which you operate, you may have access to some or all of the following:

Short Term Loans

Lasting anywhere between 3 months to 12 months, a short term loan is ideal for when immediate problems or opportunities come up that need tackling.. The issue with this sort of loan is that lenders tend to charge higher interest rates that are applied on a monthly basis, as opposed to an annual one. 

Government Start-Up Loans 

These are loans provided by the government that help new businesses get off the ground. They combine a mixture of low-interest rate loans and grants with businesses able to borrow up to £25,000 over a five year period.

Bank Loans

These are one of the most common types of loan. Finance provided by banks and building societies allows your business to borrow a lump sum and pay it back over an agreed period.

Most of these business bank loans need a director’s guarantee. This means that if a company cannot pay the loan back, the director will be personally liable.

Asset Finance

Asset finance is a useful tool that allows businesses to secure finance against their assets. This usually allows companies to borrow more than they would be able to with a typical loan as the total value is secured against said assets.

Almost any kind of asset can be used as collateral but the most common are machinery, property, land and stock.

Invoice Finance

Invoice financing is a perfect product for any business that has multiple outstanding invoices yet to be paid. A lender then buys these invoices from you (for a fee), allowing you to raise the outstanding funds immediately. 

There are two types of invoice finance:

Factoring – This is where the lender manages the invoices themselves, processing sales and collecting the outstanding invoices.

Invoice Discounting – This is where the funds are released before any invoices are paid. You then owe the lender any outstanding balance.

 

Business Development Loans

Business development loans are for just that, developing and expanding current business operations. Whilst these are often offered by banks and building societies, it is recommended to use specialist financing companies where a detailed plan and flexible arrangement can be drawn up.

Some of the things business development loans can help with include:

• Projects and growth initiatives 
• Business acquisitions
• Partner buy-ins & buyouts 
• Research and development
• Renovations and refurbishments 
• Stock purchasing

White Oak UK is an FCA authorised and regulated lender that operates across Europe. We have over 25 years of experience in helping businesses to raise finance in a way that suits them and their setup. 

We offer a wide range of finance package options that can help both established businesses and those just starting out. Get in touch with our expert team of finance advisors today.