The word “small” in small businesses can sometimes be a misnomer. True enough, small businesses can require a considerable amount of capital to properly set up and get running. While some will be able to afford a significant investment of cash in order to kickstart their budding enterprises, others certainly will not – hence the existence of business loans.
Business loans work very much similarly to personal loans. However, they differ in two aspects: One, in business loans, the business or the company itself acts as the debtor or lender, rather than just a specific person. Of course, the difference will not be entirely significant if the business is owned by just one individual – rather when the business is owned by multiple people via a corporation or trust.
More importantly, personal loans are unsecured loans – that is, the loans are not secured against any asset you own. Creditors providing personal loans do not hold any of your property as collateral. Compared to business loans, wherein creditors secure the loan against the company’s assets, e.g. furniture, appliances, vehicles, land, and buildings.
While there are lenders that do offer unsecured loans for start-ups, most types of business loans are usually secured. Hence, this is definitely one of the more important aspects to consider when taking a business loan.
Why do businesses take out loans?
Businesses take out loans based on two general categories: to help boost funding, or to help boost credit rating.
Taking out a business loan, for its immediate effect, essentially gives a company readily available cash. This can be used for a variety of expenditures, some of which will be talked about later. And while an owner may certainly have enough cash in his personal savings to pay for the business’s expenses, it is important to note that personal savings should be saved for personal matters – a child’s college fund, emergency expenses, and so on. Hence, taking out business loans might be a worthwhile endeavour.
But taking out business loans, especially small loans with easy interests rates, help increase your credit rating. Getting a large loan immediately for a start-up business can be quite difficult to pull off, as many lenders may not be as confident in your ability to pay back.
However, getting small business loans and staying on schedule when it comes to your payments helps boost your credit score, which in turn boosts your company’s financial credibility.
What is a business loan used for?
So some people wonder what is a business loan used for, one of the most common reasons is starting up a new business. According to recent data, as much as 600,000 new businesses are created in the United Kingdom each year. Taking a business loan remains one of the easiest and most accessible method of raising the needed funds to get one’s company started.
Another reason companies take out business loans is to fund company expansions or capital expenditures. A company which intends to launch a new product or purchase a new delivery vehicle as it expands to more areas will certainly require more readily-available investment sources. Business loans are a good way to fund these expenditures so such plans can be executed quicker.
Lastly, businesses may not be doing so well as initially thought or projected. Companies may also find themselves unable to generate cash flow. In order to maintain their operation or overhead costs, they can acquire a business loan to cover these expenses in the meantime or maintain cash flow.
There are many other reasons why business owners take out business loans, but the abovementioned three are the most common ones.
Advantages of taking out a business loan
There are many different advantages of taking out a business loan. One key advantage of taking out a business loan is that it provides readily-available cash. As already mentioned, this quickly-acquired resource can then be used for whatever your business’ financial needs are.
The ease at which you can contact a bank or lender and the relatively short waiting time it takes to find out if you qualify for a small business loan is better than pitching your business to an investor, trying to raise capital through crowdfunding, or other means.
Small business loans can also be quite advantageous as the money you receive from a loan is unattached, i.e., the bank or lender does not need to become a part-owner in your company or have decision-making powers in order for them to provide you with the cash you need, unlike say, an investor.
Furthermore, as interest rates from loans are fixed, you need not pay banks or lenders and portion of the profits generated from the loan. So long as you pay back the loan on time, how you spend the money you acquire from the loan and how you profit from it is entirely up to you.
Disadvantages of taking out a business loan
Despite the ease at which anyone can apply for a business loan, not everyone will be approved in taking out one. This is definitely one of the more common disadvantages in trying to take out a loan. In this regard, it is important to know exactly what the requirements for a loan are before trying to apply for it.
Furthermore, not everyone who will be approved for a loan will be given the amount of money they requested. Some may receive less.
Another key disadvantage of taking out a business loan is that they carry an increased risk. Loans are debts, which bring with it an inherent risk and liability. Regardless of how your business turns out, you will have to pay back your loan together with the interest at the prescribed time.
Also, since most business loans are secured, they can seize your business’s assets should you be unable to make payments on your loan.
How much can you borrow to start a business?
While it may be common and logical to think about acquiring a large, long-term loan in order to set up your business and keep it afloat for a reasonable amount of time, chances are, as a start-up business, you probably won’t be able to find a bank or lender who will be willing you that kind of amount in the flexible terms you are more comfortable with.
As such, up-and-coming companies are better of taking out small business loans if they are keen for a quick injection of cash and get their business off the ground.
Most banks and lenders in the UK offer a loan between £1,000 and £50,000 for small business start-ups, depending on other requirements and criteria. The most common criteria for these lenders is that the company should already have the business set up.
Those that do not require these typically ask that cash flow accounts, profit forecasts, as well as a business plan be made available. In this regard, it is important for each company planning to take out a loan with their preferred bank or lender be familiar with the requirements before applying for a loan.
Conclusion:
Despite all the other available options today, taking out a small business loan remains one of the most easily accessible ways to raise capital and funds in order to start a business in the United Kingdom. Companies should be aware of the benefits and risks involved before deciding to take a business loan.