Applying for a Business Loan
Choosing the right type of business loan can be a factor which contributes to the overall success or failure of your business, and so it is crucial that you spend time considering all the available options. Factors which are important to examine in detail include finding a lender you can trust, the purpose of your finance, and whether or not you can truly afford the loan.
It might be beneficial to apply to your existing bank or an organisation that you, as a business, have a good relationship with: you might be able to negotiate more favourable terms as an existing customer. However, you should always compare loan rates in order to find the best deal. Many banks and websites provide comparison tables for the various business loans on offer, and comparing the APR (Annual Percentage Rate) of different loans can also be a useful exercise.
The term APR stands for Annual Percentage Rate, referring to the interest rate which the lender is charging you each year on your loan. It is a legal requirement that APR rates are published for the benefit of the business (or customer) looking to take out a loan, to enable them to make comparisons more easily between loan offers from lenders. It is important to compare only the APR that the lender offers in your individual case and not the initial rate which is advertised, because these may differ considerably. Remember that banks are only required to offer the advertised APR rate on loans to around two-thirds of their customers. If your circumstances place you into the other 'third', the interest rate you are charged may be much higher; it is worth querying the APR you are offered if you consider it to be unfair. This is likely to occur if you have a poor credit rating, a lack of collateral to offer against your loan, or a business plan that is perceived to be relatively high-risk.
It is also advisable to weigh up the relative advantages and disadvantages of different sources of finance, because business loans may not be the most appropriate choice for your business. You may decide that finding a Venture Capitalist to finance your new business is a better option, for example. This is known as 'equity financing', whereby the lender becomes a part-owner of your business rather than charging you interest on the loan amount (see Debt and Equity Finance).
It is possible to apply for some small loans online, but it is advisable to contact your bank, or other lending institution, for an appointment to discuss long-term business loans. In order to apply you will need to fill in application forms, detailing your personal details and those of your business. You will usually need to give the prospective lender a copy of your business proposal, which outlines the amount of money you need, how you aim to spend the money and how you aim to repay it. The business plan will also give details of any assets you intend to offer the lender as security, in case you are unable to make repayments. The lender will read and assess the business plan, and typically carry out credit history checks on both the applicant and their business. If you are successful, or if the lender has further questions, they will contact you directly.
