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How does a small business loan work?

The vast majority of small businesses require some form of cash injection to help them to grow, or to keep them afloat in tough times. And there is plenty of small business loan support out there, for all businesses operating across a diverse range of sectors.

If you’re considering taking out a small business loan, you’ve certainly landed in the right place. Here’s our guide to everything you need to know about small business loans and how they work.

First and foremost, what is a business loan?

A business loan is a loan that is secured for business purposes, with business owners borrowing a specific sum of money from a bank or other credible financial institution. Businesses decide to take out loans for a whole host of different reasons, including expanding operations, purchasing equipment or inventory, and increasing working capital.

Businesses may also take out loans to pay off debts or take on new members of staff. Commercial businesses can typically borrow anything between £1,000 and £3m.

Secured vs unsecured loans

There are lots of different loans available and the right loan for your business’ needs will depend on your individual circumstances. For example, when exploring the market for loans, you will come across secured, unsecured, bad credit, small business, and short-term loans, so it’s important you understand the differences between each loan type.

What is a secured loan?

A secured business loan allows borrowers to access larger sums of money, providing that they have an asset such as a property or equipment to offer as a form of security and personal guarantee. This means the loan is secured and, therefore, if the business finds itself unable to make the agreed repayments, the lender can recoup the outstanding funds through the borrower’s assets.

What is an unsecured loan?

An unsecured loan, on the other hand, is a loan where the amount borrowed does not need to be secured against a personal or business asset. Lenders are aware of the risk of unsecured loans, which is why many of these types of loans have longer repayment terms or higher rates.

Types of business loans

There are many different types of loans available, offering a wide range of options to secure the working capital you need.

When it comes to picking the right business loan for your circumstances, you will need to consider how much you want to borrow, how quickly you want to pay it back, and of course, how you can secure the best possible rate. The loan industry is extremely competitive, so it’s always worthwhile considering all your options.

At Fluidly, we can find you pre-qualified loan options in seconds. Simply enter your company name here.

We’ve taken a look at some of the most common types of business loans:

Bank loans

Bank loans are the most common type of loan. They involve borrowers going to a particular bank or building society in order to secure finance. With a business bank loan, you can secure a lump sum which you will be expected to pay back over a set amount of time.

If you choose to take this route, you should be aware that the vast majority of banks require a directors’ guarantee, which means that, if your business is unable to pay back the loan, the directors of the company will be personally liable for the debt.

Of course, before signing any loan agreement, you should always compare the deals available on the market.

Asset backed

An asset backed loan is a type of secured loan that is backed by a business asset such as stock, land, property, or machinery. As a result, borrowers are able to borrow more with this type of loan, which can come in handy if you require a larger sum of money.

Invoice finance

An invoice finance loan works a little differently to other loans as, rather than a lender loaning a set amount of money, they buy outstanding invoices from the business instead. For example, lenders will buy your outstanding invoices for a fee, which releases the funds that you’re owed by your customers or clients. This is a great option for those businesses that are struggling with cashflow.

There are two different types of invoice finance – factoring and invoice discounting. Factoring is where the lender manages your sales, collecting the money directly from your list of customers, whereas invoice discounting is where the lender releases funds before your invoices are paid and you’ll then need to pay any outstanding balances.

Short term

A short term small business loan is a loan that can be secured for a short period of time, usually two to three months. This is a great option if you’re looking for a short-term cash injection. However, you should be aware that short term lenders typically charge larger interest rates. You will also be charged monthly interest rather than an annual rate.

Covid-19 loans

Covid-19 has had a major impact on the world’s economy and, as a result, many businesses have been forced to seek financial support. There’s lots of support out there including the Coronavirus Business Interruption Loan Scheme, which has been designed to support small businesses.

Delivered via the British Business Bank, the government will provide a guarantee for up to 80% of each loan to help support small businesses. This is particularly beneficial for businesses that would otherwise have insufficient security to meet the lender’s normal loan requirements. However, all businesses will still be 100% liable for the funds they borrow.

There are also no associated fees for businesses and lenders that are participating in the scheme.

What can you use a business loan for?

You can use a business loan for a wide range of purposes. Below you’ll find some of the most common reasons why businesses take out a loan:

  • For cashflow shortages
  • Take on new staff
  • Purchase stock
  • Move premises
  • Buy new equipment
  • Pay off any outstanding debt
  • Expand operations

Of course, the right business loan for you will depend on your individual circumstances.

How to get a small business loan

At Fluidly, we can take the hassle out of searching for the perfect loan with our business loan calculator.

Simply tell us your company name and we can match you with pre-qualified funding offers from a range of lenders in seconds, including CBILS providers.

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