Introduction to Business Loans
Business loans or 'commercial loans' are sums of money lent to a business in exchange for either a fee, or a share in the business. There are a number of different types of business loans including unsecured and secured loans, overdrafts, mortgages, and increasingly, invoice financing. This list is not exhaustive, and each available type of business loan will have its relative advantages and disadvantages. The most appropriate type of business loan for you will depend on factors such as the size of your business, how established it is, how much you need to borrow, and for what purpose.
You can take out a business loan from a number of sources, for example from large national banks, smaller regional or specialist investment banks, or from private individuals or group investors. In almost all cases it is necessary to make an appointment with a financial manager in order to discuss your proposed business plan and analyse its viability. Should the manager decide that your plan is likely to succeed, the individual terms of your loan will then be negotiated, including the interest rate charged, the repayment period, and other general terms and conditions of the loan.
The level of flexibility that you will be granted regarding these conditions will depend on factors such as: the perceived risk associated with your proposal, whether or not you have secured the loan against a property or other assets, known as giving collateral for a loan, and your perceived stability as a business, including your past credit history and the capability of your current workforce. Of course, the more stable and successful your business is, the more favourable the terms of your loan will be, since the loan will represent less risk for the bank.
Business loans are a suitable source of funding for a wide range of business activities. These activities might include financing a business start-up, expanding the current site or product lines, or simply increasing the amount of working capital for day-to-day activities. Business loans are most frequently sought by Small and Medium sized Enterprises (SMEs), although large businesses also require financing. Large businesses, despite being theoretically less risky and therefore more likely to be approved for a loan, tend to use retained or reinvested profits in order to afford growth and other business activities.
Many SMEs find it difficult to gain approval for a loan because they lack sufficient collateral to act as security. It is often even more difficult for budding entrepreneurs and new businesses, as they may have very few assets and be unable to accurately calculate sales projections. It is widely acknowledged that many start-up businesses fail in the first few months or years, and as a result lenders are often sceptical that the business will succeed, and be able to make loan repayments. In response, the lender might offer a very high interest rate in order to minimise the risk involved for them, or simply refuse to provide the loan.
For more details on business loans, see:
