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How do small business loans work?

by Staff Reporter
30 Oct 2018 at 16:06hrs | Views
'assets' - Mike Cohen via Flickr (CC BY 2.0)
Owners of small businesses often need financial help to turn their dreams into reality. It could be to expand or that they need to buy extra equipment or more stock, or they would like to fund a marketing campaign. They may need more employees so have an increased payroll, or they could need to finance moving to larger premises. Whatever the reason, small business loans can come from several sources, including banks and other financial institutions.

What Is A Business Loan?
A business loan is a form of borrowing designed for commercial enterprises. Businesses can borrow from a little as £1000 up to millions depending on its size and financial status. There are also two main types of business loans, secured and unsecured.

Unsecured loans allow your business to borrow money without risking any assets. With a secured loan, the business has to use its assets as security, and if the loan does not get repaid, the assets are seized. In the case of property and machinery, the lender would be looking for assets that are worth more than the amount being borrowed. They would then sell them at an auction as a forced sale, and not expect to get the full value.

If the business were a sole trader or partnership, the lender would expect any shortfall to be made up by the proprietors. If the business were a limited company, they would not be able to do this unless the directors had personally guaranteed the debt.

As you would expect, some lenders are easier to borrow money from than others, just as some require more security than others. If you are looking for the best small business loan company, these are factors you need to take account of, as well as the diversity of products offered.


'assets' - Mike Cohen via Flickr (CC BY 2.0)

Alternatives To Business Loans
Business loans are not the only way for businesses to raise finance, it really depends what they need the money for. If they want to purchases premises, for instance, they can raise a commercial mortgage.

If they want to replace the company vehicles or some machinery they have the options of hire purchase or leasing them.

If cash flow is their problem they could consider invoice factoring. This gives the up to 95% of their invoice amounts very quickly, the balance being withheld until the customer has settled in full. From the balance, the lender takes their fees. There are no restrictions on what the money is used for with this type of finance. Although most small businesses use it to ease cash flow issues, it could be used to help their growth, to buy new equipment or for anything else at all.

Choosing The Best Finance Deal
There is an old saying among business owners that banks will only lend to people who don't need it. For some small businesses, that is exactly how it must feel. They have to jump through hoops and wait weeks for a decision and this is all delaying the progression of the business.

If you need finance for your business, look at all the options. Consider the fees and interest rates, and find the best deal for you.

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