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How do business loans work?

If you’re the owner or leader of a company, there may come a time when you need to raise funds to take your organisation further. You may be looking at expanding your customer base, or need some help to improve the company cashflow. A small business may need to borrow to cover operational costs until your business is large enough to cover your working capital needs.

Planning your professional next step may require a funding plan. Find out more about business loans, and how they work.

The most common way to raise working capital is with a business loan. There are many options available to those considering a business loan, each with their own requirements. Read on to find out how business loans work and if they could be the right choice for you and your organisation.

Who can apply for a business loan?

Anyone who owns a business, whether self-employed or limited company, can apply for a business loan. However, your eligibility for applying can depend on the type of loan you wish to apply for and what kind of company you are part of.

Limited companies, sole traders and freelancers alike may be able to take out a business loan in order to fund operational needs and strategic decisions.

Applicants under the age of 21 and over the age of 65 years are unlikely to be granted a business loan, but it’s worth researching individual providers to double-check.

To apply for a business loan, you will need to provide your personal details and valid evidence of your business earnings. You will then likely be required to provide your company’s trading and payment history once further discussion around your loan application begin.

Types of business loan

The most common types of business loan are as follows.

Unsecured business loan

An unsecured business loan allows the borrower to acquire a loan without holding it against any personal or business assets. However, the borrower must be able to give evidence of a good credit history to the lender to get an affordable rate.

Secured business loan

Unlike an unsecured loan, a secured business loan is held against your business assets. This could be anything from your company car to your home, which is used as payment to the lender if you fail to repay the loan. By using collateral to secure a loan, borrowers may be able to secure favourable rates.

The main difference between these two loans is what the borrower must provide for their loan to be accepted. If you have good credit history, then an unsecured loan could be the right option for you.

If not, it may be worth looking into a secured loan, for which you can put up commercial property or another business-owned asset. Just be sure you can make the required repayments on time to avoid losing any financial assets.

What is a director’s guarantee?

When a company is entering a loan agreement, the directors can sign a director’s guarantee to obtain the initial funds. This type of loan is common for organisations with limited financial assets, and therefore means the lender will require added protection to ensure the company’s debts are paid.

Those involved in the signing of a director’s guarantee are liable for any debts made - meaning anything the company cannot repay must be made by the individual signees.

The benefit of a director’s guarantee is that it could help your company secure funding for something you otherwise may not be able to obtain. It can be a viable option for those who are certain they can repay. However, making a director’s guarantee should be considered carefully, as it may involve putting up your own assets against the loan.

Will I be accepted for a business loan?

When considering applying for a business loan, it’s important to bear in mind that you might not be guaranteed the funds. The reason for your loan not being accepted by the lender may not always be clear, but it could be down to poor credit score, or insufficient evidence of strong business cash flow.

If your business loan application is accepted, it’s important to make sure that the loan you are offered is the right one for you and your business. Take your time to research lenders and find a loan that works for you.

Paying back your business loan

The amount of time you have to repay the funds for your loan and the interest depends on your lender. Loan terms most commonly range between 6- and 60-month repayment schemes, but some offer up to as much as 30 years. However, be aware of the additional interest fees that are applied to repayments until your loan is repaid.

It’s important to be sure that you can repay your loan on time as agreed. In the event you are unable to repay your business loan, the lender is eligible to take legal action against your business. Consider what repayment schedule is reasonable for you before accepting any loan.

If you’d like to find out more about the ins and outs of business loans, you can read about it on our website.


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