A Beginners' Guide to Business Loans

Whether you are starting up a new business or if you have been in business for a while, there may be a time when you need additional finances. Business loans are a popular choice for injecting capital into a business, are widely available and come in many shapes and sizes.

What Is a Business Loan?

Commercial business loans are available to most small and start-up businesses (subject to financial and credit status). You do not have to travel very far to get access to the small business loan market, most high-street lenders and banks will have loan packages to suit your needs. Similar to an ordinary personal loan, the business will borrow money and then repay it over a pre-agreed number of months or years at a fixed or variable rate.

Interest Rates

Business loans are available in fixed and variable rates, but many lenders will have other options for you to choose from. At a fixed rate, you will only have to pay back the money at a rate that has been pre-set by the bank (this varies from lender to lender). Variable rates are linked to the Bank of England’s base-rate, and are likely to fluctuate. With a fixed rate loan you know your rate is going to be standard over the agreed period, but with variable rates you are taking a risk. If the Bank of England lowers interest rates you will pay less, if they raise the rates you will have to pay more.
Look out for ‘capped’ interest rate business loans. These are a mixture between fixed and variable; while the rate you pay will fluctuate, you will benefit from not having to pay over the capped level.

Tips and What To Look Out For

It is very important to search around before choosing the bank or building society that you would like get a loan from. Many businesses will simply choose the lender they are currently with, despite the fact that there are many banks or building societies that offer better rates. Do not do business with any lender who has not subscribed to the Business Banking Code.

Make sure you read the small print; there may be hidden charges or penalties such as an initial fee, late payment charges or redemption penalties. Also, look out for ‘add-on’ fees, which may increase the real repayment rate later. If you ask a potential lender to disclose any of their fees they are obligated to by law.

Finally, it is important you find the right loan package for you. If you are inexperienced or unsure seek help from an accountant or an advisory service.