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What is Business Loan? Definition and Types

All small businesses and startups began with a great idea. For many, the next step was to borrow some money in terms of business loan to fund that idea. When starting a company, the easiest way to borrow money is through taking out a loan.

Loans are common in personal finance; student loans, car loans, and mortgages are seen as a regular part of life. Business loans are the same, but instead of being used to finance personal items, they are used to finance a business.

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In general terms, a business loan is a sum of money issued to a business owner exclusively for use in their business and is repaid—with interest—over a set period. The distinction between a business loan and a personal loan is that a business loan is used for buying things like stock, plant & machinery, and equipment. In contrast, a personal loan is mainly used for buying things like cars and home improvements for private use.

Understanding how business loans work can help you find the right financing for your company, which can be a lifeline when used responsibly. Typically, a business loan can range from £1,000 to several million, with terms varying from a one-month repayment to 15 years.

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Banks and non-banking financial companies (NBFCs) in India offer unsecured business loans. The major goal is to meet the immediate needs of an expanding company. Most financial institutions provide term and flexi loans to meet a company’s commercial needs. Commercial loans are another name for business loans. These loans are available to sole proprietors, privately held companies, partnership firms, self-employed persons, and shopkeepers.

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Related: What is Business Financing? and it’s Benefits

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business loan is any kind of loan offered to a commercial entity, rather than an individual person. Typically, a business loan can range from as little as £1,000 up to several million. Repayment terms can vary from one month to 15 years, depending on the type of loan and the lender.

Business loan rates in the UK will also vary, depending on a number of factors – from the length and size of the loan to your business’s financial position.

There are so many types of commercial loans currently available to UK businesses that choosing the one that best suits your needs can sometimes be tricky. This guide can help you find the type of small business funding that is right for you.

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Different types of business loans

How to Qualify for A Small Business Loan in Canada | OnDeck Resources

Depending on where the money comes from and the time in which it must be paid back, there are plenty of funding options for all kinds of great business ideas. Read on to learn about some of the most popular business loan options out there.

Term loans

Term loans are the most common type of loan. They are what is typically thought of as a loan. The word “term” refers to the length of time between when the loan is issued and when it is paid off.

The term length can vary—some term loans can have term lengths anywhere from one to 25 years or more. The lender takes the status of the borrower’s business and credit quality when determining how long the term is. A new business with poor credit may only be able to secure a short-term loan with a high interest rate, whereas a business that has been around for years and has good credit may be able to secure a long-term loan with a low interest rate, or APR.

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Start-up Loan

A start-up loan is intended for budding businesses. Due to lack of business experience, applicants for such loans may not have a strong credit history. As a result, the lender factors in the borrower’s personal credit history and the company’s credit record when determining the loan’s application. Turnover data and other factors are also considered when determining the loan amount, term, and interest rate. The company must be set up and running, and the applicant must provide evidence of its existence and licensing.

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Working Capital Loan

Working capital loans are small business loans used to cover the shortfall in cash needed to run a business. It creates the essential cash flow balance to run a business. This loan can cover a cash shortage during the off-season or to meet consumer needs during busy seasons. Service providers, producers, distributors, merchants, and traders involved in exports and imports commonly avail of working capital loans.

  • Some banks offer unique business lending programmes for women entrepreneurs. Even the Indian Government has programmes in place to promote women to start small and medium-sized enterprises. A customisable loan amount, discount on conventional interest rates, and faster application process are advantages of specialised loans for women entrepreneurs.

Related: What is Finance? Definition and It’s Types

There are many other types of loans which can help businesses. If you are looking for a business loan, IDFC FIRST Bank helps business owners efficiently run their business through loans at a low interest rate. You can also take a personal loan for self-employed people from IDFC FIRST Bank and use it to give your business the boost it needs.

SBA loans

In a world of global corporations, small businesses have it rough. It can be hard to start a company from scratch, even if it’s a small one. The government’s way of solving this issue is to subsidize small businesses in the form of an SBA 504 Loan.

The SBA, or Small Business Administration, does not issue loans to small businesses, but through this type of loan, it guarantees to pay back a portion of a bank loan taken out by small business owners.

In simple terms, an unsecured loan does not use your business assets as a guarantee, while a secured loan allows you to borrow money against any assets you use as security. The pros and cons of each are discussed later.

  • Bank loan – The simplest type of business loan is a bank loan. This works just like a personal bank loan – your business borrows a sum of money and pays it back over a set period of time, with interest charges added. Banks often require a director’s guarantee before offering small business loans.
  • Revolving credit facilities – Some businesses, generally larger ones, use revolving credit facilities to access funding. These facilities allow a business to borrow money only as and when it is needed. The sums can be paid back at any point and interest is only charged on the amount borrowed. Such a facility can stay in place for many years and is often significantly larger than any individual loan taken out by the business.
  • Bridging finance – Many lenders – including banks – also offer short-term loans or bridging finance. These loans allow you to borrow over a much shorter period of time, maybe even just a few days. They can be used to cover short-term cash flow problems. But short-term business loans are usually offered at a much higher interest rate, so you will end up paying more.
  • Peer-to-peer loans – One newer form of financing available to UK businesses is what is known as peer-to-peer lending. This is done through online platforms where borrowers can ‘match’ with investors of any kind – including private individuals – who have money to lend and are looking for a return. As with bank loans, peer-to-peer lenders may need a guarantee from a director before offering a loan.

What can business loans be used for?

Small Business Loans | Original Funding

The short answer is pretty much anything you need it for. A business loan can be used to help fund the purchase of premises for your business, to help you buy stock, or to cover ongoing running costs.

You might need a long-term business loan to finance a start-up company if you do not expect to bring in any revenue for your first few months. Equally, you could be a well-established business that is encountering a short-term and temporary cashflow problem and needs funding to tide it over.

At all times, you need to be aware of what a loan will cost you both in the short and long term. That means being aware of the rate charged on your business loan and of the consequences if you cannot make repayments.

Is a secured business loan or an unsecured business loan best?

An unsecured loan does not put your business’ assets (such as property or stock) at risk but might be more expensive. A secured loan is often cheaper and allows you to borrow more but risks handing over your assets to the lender if you cannot make the repayments.

What might be best for you depends on a number of factors, including the size of your business is, how much you want to borrow, and how much personal liability you are prepared to accept.

The advantage of a secured loan is that it may well allow you to borrow a larger amount and at a lower interest rate. But, if you can’t keep up with the agreed repayment schedule, you are at risk of losing the assets that you use to secure the loan.

Unsecured business loans can be easier to get, especially for a start-up that owns few assets and hasn’t been trading for long. The downside is that you are likely to be able to borrow less and that the interest rate could be higher, as the lender will be taking on more risk.

How to find a business loan with Bionic

Finding the right business loan for you can be daunting. But Bionic’s expert advisers and smart technology can help you choose the one that’s best for you.

We can also take all of the legwork out of the process of applying for a business loan. We will tell you what documentation you need at every stage and handle the application process for you.

All we need from you to get started is your business name and postcode.

What happens when loans don’t get paid off?

If a business defaults on a loan — meaning it cannot pay the money back to the lender — there are a few things that may happen. The business could use more debt financing to generate the capital it needs to pay off the loan. If there was an asset being held by the lender as collateral for the loan, the lender could claim that asset as payment.

If the company cannot pay off any of its debts or generate any more capital, it may face bankruptcy and be forced to liquidate all of its assets, in which case lenders would be paid back before any company equity holders.

Can I get a business loan with bad credit?

Credit rating is one of the most valuable indicators of what interest rate you’ll pay for a business loan. Risk is partly determined by the term length and the security you can provide. The official interest rate for the United Kingdom is called Bank Rate, set yearly by the Bank of England which keeps a close watch on the financial system, so you can have confidence that whatever rate a lender offers you will be transparent and consistently priced.

A less favourable credit score will not jeopardise your chances of getting a business loan. Specific lenders specialise in bad credit business loans, including secured business, guarantor, high-interest, and unsecured loans. In addition, businesses that need capital can also avail of merchant cash advances, asset finance and invoice finance.

How can I improve my chances of getting a business loan?

If you are intent on growing your business, you will need a new source of capital to support you. Take heed of the following steps to prepare your loan application, along with some essential considerations.

Check your credit report

All lenders will check your credit history when you apply for a business loan. Get a copy of your report and ensure it accurately reflects your recent transactions and lending history. Those with the most favourable credit scores will get the best lending terms; hence it’s worth trying to improve your score before applying for a new funding source.

Get your finances organised

Before you apply for a new loan, make sure that you settle all outstanding debt. A demonstrable positive cash flow means a company’s liquid assets are increasing, enabling it to cover liabilities, grow the business, pay expenses, and provide a bulwark for unexpected situations. There is always the option to use debt refinancing when a borrower applies for a new loan or debt product with better terms than a previous agreement and can be used to pay down the existing obligation.

Check your business accounts

Most lenders will seek to review your most recently prepared financial accounts. Accounts filed over two years may not be accepted, so please ensure that you have accurate and up-to-date accounts filed. This should include a detailed P&L and a balance sheet.

Make a plan

At a minimum, you will need to explain how you intend to spend the loaned capital. If the money is for working capital, expect to be asked for more details about why you need it. You might need to borrow money to consolidate your business debts. If this is the case, you will have to make a plan and analyse how this will be achieved and benefit your business. Ensure that you can explain why you have arrived at the sum of money you applied for and that you can meet the planned repayments. This will convince a potential lender that you are a credible applicant. The business loan calculator is helpful for this and provides a breakdown of your estimated monthly repayments.

How do I apply for a business loan?

Funding Options helps UK firms access business finance, working directly with businesses and their trusted advisors. Funding Options can introduce applicants to a number of providers based on the applicants’ circumstances and creditworthiness, with all quotes being subject to status and income.

Our award-winning platform, Funding Cloud(™), accurately and quickly matches businesses with the right lender and finance option for their needs. From unsecured business loans to revolving credit facilities and a merchant cash advance, we work with over 120 lenders offering dozens of lending products. Apply for funding in minutes – our record from application to credit approval is just 20 seconds, and cash in the bank within as little as 18 minutes.

Apply today to get the funding you need to trade, plan, and grow with confidence.

 

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