The inside track about business loans

Business loans are designed to help start-ups get off the ground and companies to expand. By receiving financial assistance, business owners may be able to achieve far more of their entrepreneurial ambitions than they could without one.

What is a business loan?

Business loans are given to invest in the enterprise to improve its turnover in the long run.

They are characterised by being secured against the equipment, property or furniture belonging to the business itself. Therefore, if you are unable to pay your loan off in full, the lender is able to take your business assets off you to recover the cost.

How to qualify for a business loan

To be eligible for a business loan, you need to have all the right documentation in place. This includes:

  • Three years of financial statements (unless it’s a start-up)
  • Balance sheets, profits and expenditures
  • Tax returns
  • Contracts with suppliers, clients etc.
  • Your business plan
  • Forecasts for the term of the loan in terms of profits / loss
  • Breakdown of costs the credit will be spent on

Your turnover and profit projections should be thorough and well-thought through, as they are integral to your application being accepted.

In order to qualify for a business loan, your company will also need to have a good credit history. If it has made a loss, or missed credit card, mortgage, loan, utilities or rent payments, its credit score will be low, making it more difficult to be granted a loan.

Can start-ups qualify for a business loan?

Yes, business loans are very influential for start-up companies. They can help enterprises get off the ground by purchasing equipment, renting a property and paying members of staff if there’s not enough capital to do this.

However, as you won’t have financial statements or a company credit history, your business plan will be even more important to lenders. Your personal assets might also be used as collateral if you default on the loan.

Where to get a business loan

Major banks and independent lenders offer business loans, with the amount depending on the size of the company and its credit history.

However, before you sign up to a financial product, it is important to check its terms, in particular the rate of interest on the loan. As you will have to pay back the money in monthly instalments with interest, you don’t want to stretch your budget by committing to a loan lasting several years that you can’t afford to pay back.

Alternatives to business loans

Those who don’t want to pay back interest charges over a long time might be interested in the alternatives to business loans. These include:

  • Overdrafts on business accounts

    While you’d have to pay interest on the overdraft, you might find this is lower than the rate on a loan, particularly if the amount you need to borrow is relatively low.

  • Cashflow finance

    This involves borrowing against the value of unpaid invoices if your finances are tied up in payments you’ve not received yet.

  • Business credit cards

    You can find ones that offer interest-free periods, enabling you to borrow without paying a fee.

  • Borrowing against your business assets

    You would borrow money against the value of your property or equipment, but if you don’t pay it back in full, you would lose your asset.

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