Business loans constitute one of the primary methods that businesses manage cash flow and invest in their operations. Like loans made to individuals, loans for businesses can be applied to a broad range of needs. Business owners and their financial managers apply for specific kinds of loans depending on the need being met.
Applying for a business loan is similar to applying for a consumer loan. Perhaps the biggest difference is the amount of supporting information businesses must furnish in order to prove that they are loan worthy. That is reasonable, given the fact that business loans are typically much larger than their consumer counterparts.
As a small business owner or financial manager, here are five important things you should know about business loans:
1. How Short-Term Loans Work
Businesses can obtain both short- and long-term loans depending on need. Short-term loans are so designated because they are paid off fairly quickly. They can be obtained as standard loans or bridge loans, and they can be offered with a variety of terms and conditions, depending on the lender.
The most important thing to understand about short-term loans is that their interest rates tend to be a little higher. This is due to the fact that lenders make their money on interest. The shorter the loan term, the less opportunity there is to make enough profit to cover the desired margin. As such, rates are higher. For the record, short-term loans are usually designed to assist with cash flow management.
2. How Long-Term Loans Work
Long-term loans are designed for things like capital improvements, investing in new facilities, or expanding a company's reach. A loan with a repayment term in excess of five years is considered long-term. Note that these loans tend to be made in higher amounts.
Unfortunately, high street banks tend to be reluctant to make long-term loans to small businesses. Business owners and financial managers may have to put in quite a bit of time to find a lender willing to help out.
3. Assets Play a Role
Just as with consumer lending, business lending involves both secured and unsecured loans. A secured loan is backed by some company asset with enough tangible value to satisfy the lender. Secured business loans generally come with better terms and conditions and lower interest rates, just like their consumer counterparts. A lack of sufficient assets may require a business to accept an unsecured loan with higher interest rates and less desirable terms.
4. Loans Don't Have to Come from Banks
It is quite common to look to high street banks as the first source of business loans. But not all loans come from banks. Businesses can also look to private lenders and peer-to-peer (P2P) platforms. In fact, private and P2P lending are often viewed as more attractive to small businesses that have trouble securing loans from traditional banks.
5. Government Assistance Is Available
Finally, there is a limited amount of government assistance available for small businesses in need of funding. The government's Start-Up Loan Scheme makes up to £25,000 available to new businesses as free, unsecured personal loans. These are short-term loans with a repayment term of up to five years.
Government grants are also available from time to time. Though the availability of grants is never guaranteed, they are a supplemental source of funding when you can get them. The benefit of grants is that they do not have to be repaid as long as the business meets the terms and conditions set forth in the grant announcement.
Business loans represent a tried-and-trusted method for funding business operations. But they must be used wisely. Just like their consumer counterparts, business loans can be as much a financial trap as they are a funding boon.