Editor's PickInvesting

Taking Out A Business Loan: Frequently Asked Questions And Answers

6 Mins read

One of the most important things to consider when running a business, regardless of size, is funding.

While larger, sprawling corporations will generally have many more income streams, small and medium-sized enterprises may require a bit of extra funding assistance for certain endeavours. For example, you might need to upgrade your tech to increase productivity, or you might want to renovate your office space to improve company culture and motivate your team. However, as an SME, you might not be able to afford to pay a lump sum to handle one of these projects as your budgets are likely going to be wrapped up in other areas. This is why it is common for SMEs to take out a business loan to help cover these expenses. However, choosing a business loan is not always the easiest decision, so we compiled this FAQ to answer some common queries to help explain how to get a business loan as well as what a business loan specifically is.

What Is A Business Loan?

Before we discuss how to get a business loan, it’s important to fully understand what they are. A business loan is simply where you borrow funds from a lender, such as a bank or funding pot for your small or medium business. There are a few different variations of small business loans and understanding which one is right for you requires a bit of research and planning to ensure you get the right one. Ultimately, you will borrow the money to pay for a specific project or purchase and arrange to pay it back on a regular basis that works for both your business and the lender.

What Types Of Loans Are Available?Small business loans come in a variety of different types, each with its own pros and cons. None can really be categorised as the best option for all businesses, however. Instead, it’s important to figure out the right one for you by speaking to a financial advisor as well as making use of tools such as a business loan calculator While there are a lot of different types of small business loans, the four most common are listed below.

Line Of CreditWhile not an agreed-upon sum, a line of credit is probably the most common form of business loan you’ll have. Most businesses will have a line of credit in the form of either a business credit card or even an overdraft. This is a limit that will be agreed upon by you and your bank, allowing you to borrow as and when you need it. This is very useful for unexpected expenses as you can simply pay using your credit card as long as the cost doesn’t surpass the limit and deal with the repayments yourself.

Invoice FinancingIf you have a number of clients that you are invoicing for work, you will provide them with a grace period for payment. Ideally, they will pay you within that time, but sometimes this can make your finances somewhat unpredictable at times. This makes it fairly common for SMEs to take out business loans to cover day-to-day expenses while waiting for those invoices to be paid. Of course, there are also specific types of small business loans that are created for situations like this. Invoice financing is where you can borrow money based on the value of any outstanding invoices you have. A lender will give you these funds, and you will then pay them back once those invoice payments come through, as well as any interest.

Merchant Cash AdvanceIf your small business makes a lot of credit card sales, then a merchant cash advance could be a great type of financing for you. This is essentially a business loan in which you will receive a lump sum of funds that you will repay at a pre-arranged amount as well as a percentage of your future credit card sales. This percentage essentially serves as interest, and the benefits of this are that you won’t be paying back more than you can afford, as the amount you pay will fluctuate depending on your credit card sales.

Unsecured Business Loans

This is a type of business loan which requires no form of collateral or security for a business to acquire it. That means that you won’t have assets seized if you were to default on payments, and the lender is therefore taking on slightly more risk than you will be. However, unsecured business loans often have much higher interest rates and stricter lending criteria than a secure loan so that lenders can reduce the risk slightly. This can also include shorter repayment terms and lower loan amounts. You could look into unsecured business loans if you’re looking for a quick and small loan for immediate purchase or to fund a particular project.

How Can I Qualify For A Business Loan?When it comes to qualifying for a business loan, you will generally need to meet certain criteria set out by the lender. These can vary from lender to lender as well as country to country, so you’ll need to do your research beforehand to ensure you meet their requirements. These will often include having a good credit rating that shows you have a good reputation for repaying loans. You will likely also have to provide certain financial information to the lender, such as tax returns and financial statements.

What Should I Consider?There are a few different things to consider when applying for small business loans and to give you a good idea of this and to get you prepared for the application process, we’ve listed a few things to think about before you choose a lender.

Terms Of RepaymentThe overall amount of money you’ll have to repay as well as how often you have to make payments should be one of the primary things you consider when taking out a business loan. You can get a good idea of how much you’ll be paying in total by using a business loan calculator. This tool will show you how much you’ll have to pay each month and will even separate the principal repayments from the interest you’ll be paying. Of course, you can arrange a specific payment plan with a lender, making it a longer-term repayment plan for lower monthly repayments but more interest overall, or you could choose higher monthly payments with lower interest overall. Neither option is the correct choice, and it all depends on what is the most comfortable option for you and your business.

Chargeable FeesIt’s not just your monthly repayments and interest that you may have to pay when getting a business loan. Some may have upfront or even ongoing fees that might not be apparent when you first glance at the offer. These fees can include things like maintenance fees and origination fees. An origination fee is essentially a charge that lenders will impose on you for simply processing your application and evaluating your credit score, whereas a maintenance fee is a charge that covers the ongoing services of the loan agreement. The maintenance fee will help to cover the company’s running costs, such as administrative tasks and customer services.

CollateralIf you’re choosing a secured loan instead of an unsecured loan, you will have to put up some collateral that would cover those repayments should you happen to default on them. A business loan, as with any other loan, is technically a risk on the lender’s part, and this is why they will often ask for collateral and check your credit rating to ensure you are able and motivated to repay them. Of course, not all businesses can afford or want to put up their assets as collateral. This is why it can be a good option for people in this position to choose an unsecured loan, especially for a short-term loan.

Interest RatesThe interest rate can significantly impact the overall cost of a loan, and this tends to be one of the top considerations when deciding on a lender to borrow from. The higher the interest rate, the more you will have paid back in the end compared to what you borrowed with your business loan and this is why people often seek the lowest interest rates possible. You can compare interest rates using comparison sites to find the best deal for your business. But remember, it’s not just interest rates that you need to consider, as we’ve demonstrated above. Sometimes it can be a good idea to choose small business loans that offer a higher interest rate but maybe have lower fees or more flexible repayment terms.

These questions and answers should help you to understand what’s involved when considering taking out a business loan.