Utilising external finance is a valuable tool in the remit of any business, particularly as the UK looks to begin its economic recovery. Securing funding and using it correctly can help you overcome obstacles, achieve growth goals and improve cash flow.
One of the most common forms of external finance is a business loan. With a loan, you can access large sums of capital to use for whatever needs you may have. However, it isn’t as easy as going to the bank and asking for money. You need to do your due diligence first and find a loan that is right for you.
The loan that suits you will vary depending on your unique requirements and business context. There are several solutions on the market now, giving companies more choice than ever when selecting their funding source. There is plenty to consider when seeking an option that suits your needs as well as your eligibility.
When researching loans, there are many features to use as a comparison point. This will help you to identify the main differences and find one that suits your needs.
Below, we have listed the key features of a business loan.
The decision process
One factor to contemplate when searching for a loan is how fast you need the capital. Different lenders will have different application processes and make a decision at various speeds. In the case of banks and other traditional lenders, you could expect to wait weeks to find out if you have been accepted or not.
If you are looking for a quick release of capital, it means you’ll likely have to turn to other sources. Some alternative lenders can provide funds within days, which will be vital if you face a cash emergency.
It is also worth reviewing what the lender is looking for when you submit your application. Traditional lenders may expect extensive documentation, such as a business plan and financial information. This will make the application process potentially longer and can require substantial effort.
Alternatively, more agile lenders may require less supporting evidence and be less risk-averse. If you don’t have documentation to offer as proof of your ability to repay, this can enable you to still access finance in a quicker timeframe.
By comparing these factors, you can determine how quickly you might receive the funds from acceptance and how this fits in with your needs.
Competitive interest rates
Another point of differentiation between loans is how much interest you can expect to pay. The interest you pay is affected by the interest rate and how long you will have the loan. This will also affect the number of payment instalments, which is why a low-interest loan is usually best.
Most lenders will offer competitive interest rates to try and remain at the top of the market. However, some factors will affect the interest. For example, if you are taking out an unsecured loan or one that promises fast funding, you will likely need to bear a higher interest rate. Similarly, alternative providers who are more open to risk might charge more interest to compensate.
If you are pursuing a longer-term loan, you also need to consider that you will pay interest over the full term of the loan, though at least the interest should be fixed for the period.
When researching loans, look at the interest rate of each. If it seems high, ask if it’s worth it if you are getting some other advantage (such as no need for security). You might also review whether there is a fixed rate option, as this will help keep payments stable and make it easier to account for.
The amount borrowed
One of the most crucial considerations to make when choosing a loan is how much you intend to borrow. To secure the maximum possible sum, you will need to provide supporting documentation, security and prove yourself as a reliable and profitable business.
Alternative lenders may provide less funding, though you may not have to undergo as lengthy a screening process as a result. Similarly, if you’re a high-risk business, you may struggle to get larger amounts for your business.
By weighing up how much you need to borrow versus how much a lender is willing to give you, you can aim to find a healthy balance that addresses your funding needs. This means being realistic about your prospects and accepting that you may need to consider a small amount or alternative source if deemed ineligible for traditional funding routes.
Another factor to contemplate here is how much you can afford to borrow, based on your monthly capacity for repayments. The larger the loan, the more you will need to pay back (particularly once interest is factored in). So, it’s essential to calculate the maximum loan you can take out without straining your cash flow.
Security
Loans fall into two categories: secured and unsecured. With a secured loan, you will be expected to offer collateral so that if you default on payments, the lender can seize the money owed in some other way. With an unsecured loan, a personal guarantee is usually required.
Typical forms of collateral include assets, such as premises, vehicles or high-value machinery. Another possible requirement is a personal guarantee, where directors are expected to agree to pay the loan on your behalf if your business fails to keep up with payments. This can be a risky move, so personal guarantee insurance is recommended to protect the person undertaking the guarantee.
If you do not possess sizeable assets to use or aren’t willing to sign a personal guarantee, you will need to consider a much smaller unsecured loan. With these loans, no collateral is required, but the offset is smaller loans with higher interest rates. However, if you shop around, you may still be able to find competitive rates and a solution that fits your needs.
Repayment flexibility
Repaying a loan can be a drain on cash flow, particularly if you’re business isn’t able to predict its income from month to month or a seasonal enterprise that experiences fluctuating revenue over the year. In this case, you may be seeking a loan that offers flexibility when it comes to repayment.
Most loans will need to be repaid in monthly instalments. However, some lenders may offer bi-monthly or even quarterly payments, which can give you more time to generate the capital you need. It is worth noting that less frequent payments will mean you have to pay more at a time.
Another point to look out for is whether you can repay a loan early. Some businesses may wish to do this if they generate enough income, as it can remove the burden of a loan and even reduce the interest paid. Many lenders apply early repayment fees to discourage such behaviour, so check if your loan has this if you plan to repay it ahead of time.
It is worth speaking to lenders to see what options they can provide and whether they’re willing to take your situation into account when it comes to repayment. This will prevent you from creating cash flow obstacles and ending up defaulting on due instalments.
Get advice
The loan market is broad, with a variety of choices out there for businesses. There is also much to consider when choosing which you want to pursue, which can be overwhelming. However, finding the best loan to suit your requirements is essential to achieve your goals without restricting your cash flow and risking debt.
If you need support in finding the right solution for your business, we are here to help. Our team of advisors can give you insight into the options available, with tailored guidance about which one would be most appropriate for your specific situation.
We can also point you in the direction of lending sources to kickstart your journey while helping you through the application process to maximise your chances of success.