Whether the purpose for funding is for startup costs and operations or finance business expansions, business need sufficient amount of money for capital. It is a common thing that businesses take out business loans for them to obtain the funds they need. And, as with any type of credit, the company is expected repay the loan amount with added interest and fees according to the agreed terms and conditions of the loan.
More about Business Loans
Business loans include bank loans, microloans, mezzanine financing, business cash advances, and much more. For start-up companies, business loans are utilised to fund start-up costs and daily operation expenses, for example to pay for their employees’ salaries and wages until their new company gets stable enough. Established businesses would invest the borrowed money in office supplies, other assets such as equipment or plant, inventory, or new business projects and expansion.
Bank are the most popular sources of funding for businesses, but obtaining a loan from a bank is not a walk in the park. The process is quite tedious. Microloans are smaller business loans, usually amounting to £100,000 or even less. Mezzanine finance uses a company’s equity to secure the business loan. The agreement allows the lender to claim part ownership of the business if the company fails to repay the loan.
Online lenders offering small business loans are increasing in number, too. Nonbank lenders offering small business loans have become popular alternatives to the less lenient bank loans. These lenders provide fast, flexible, and convenient services to business owners without requiring much.
Taking out Business Loans
Most business loans are a secured type of credit. The company or the borrower puts up an asset such as building or plant, equipment, stocks or vehicles to obtain a business loan. If the loan is not repaid, the lender may claim the asset used as collateral, and sell it to cover for the money owed.
If you intend to buy an existing business or put up your own, you will always need to have your own capital or equity in your own property to serve as security for the loan. In most cases, if you need a loan to fund the purchase of a commercial property or existing business, the property itself can be considered as the loan collateral.
Business loans can be long-term, medium-term or short-term. The loan term will depend upon your personal circumstances and the status of your business. If you’re borrowing for a startup business, medium to long-term business loans would be the repayment period to take. It enables you to keep your monthly repayments low by spreading the cost over a longer period. Medium to long-term repayment period are usually in years or even decades.
Small, existing businesses oftentimes apply for short-term business loans instead of the long-term, which is most appropriate. In general, short-term business loans reach maturity in less than a year. Others would extend for up to three years. Short-term business loans are most suitable for any immediate cost in the daily operations of the business.
Business Loans in the UK
In the United Kingdom, banks are usually the port of call to take out business loans. However, many nonbank lenders in the UK now offer business loans as well. For a business loan, you can borrow anywhere from £5,000 to £1,000,000. Payback period can be as short as over six months to one year, and could stretch for five years or even decades in both banks and private lenders. Depending on the nature and size of the business, businesses can borrow as much as £5,000,000.
Start-up businesses, security often comes in the form of personal guarantees such as home or any valuable asset provided by the business owner himself and not the business. Small nonbank lenders may waive the personal guarantee requirement if the business has a strong business credit score, sales, and cash flow.
Business Loans with Guarantor
Getting business loans from your bank can be difficult if you don’t have a deposit or a residential property to put up as collateral to secure the loan. Fortunately, some lenders allow companies to access business loans with a guarantor. With a guarantor, you can borrow 100% of the loan amount you wish to borrow without a deposit or the need to put up any asset as the loan security.
The guarantor can be your parents or a relative, a close friend or a business partner, who will use their own property to security the business loan. However, you have to prove that the guarantor have a legitimate interest in the business for your guarantor to be considered. The business and its relevance to the guarantor has to make sense to the bank from a business perspective.
If you will purchase an existing business, the property will automatically serve as the security of the loan. However, if you have a standard commercial property such as factories and warehouses, you can only use 60-70% of the property value as the loan collateral.
Some specialised commercial properties such as a childcare centre will be even of lesser value. In some cases, it may not even be accepted as loan collateral at all. So, if you find yourself in a similar spot, you’ll definitely need a security for the loan. This is where a business loan guarantor can help.
On the downside, however, this is risky for the guarantor that he or she could potentially lose his or her property used as collateral in the event of a default or in the case when both you and the guarantor can no longer make the repayments.
The bank will repossess the property used as collateral and sell it to cover for the debt. However, the bank will only use portion of the sales proceeds just enough to pay off the loan balance. Whatever is left of the funds will go to your guarantor. If the reason for your default is business financial trouble, but if the sales proceeds from the business are enough to cover the loan balance, there is no need for repossession.
Even so, you and your guarantor should be aware of the risk. The most common reason to default on business loans is that the business is unsustainable, so make sure that the business has a good chance of growing in the market before getting a business loan.
305.9% APR. £400 borrowed for 90 days.
Total amount repayable is £561.92 in 3 monthly instalments of £187.31.
Interest charged is £161.92, interest rate 161.9% (variable)
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