Business financing are a viable option to obtain fund and help you realise your dreams for growth, whether it is a startup or an established company that requires external finance for growth. All entrepreneurs want to see their business ideas make an impact in the world. However, to take form, these ideas require working capital which is hard to come by.
Hence, there are several types of loans that are accessible. But depending on the financial institution, each is having different payment terms for specific businesses.
The key metrics of business financing
- Interest rate – It is among the most significant factor to take into account. Thus, higher interest rates are set for a longer payment term. As a result, you may result decrease your profits — money which could be reinvested in your business. Moreover, there are loan calculator tools online that may use to compute the interest rates are compounded. Interest rates can gain by monthly, quarterly and annually. Accordingly, calculate how much you will pay for the amount you will borrow.
- Payment duration – It would require scrutinising your financial growth. Hence, make that your business is capable of generating a size of profit. Increasingly important, that you have a budget cap for both the payment for the loan and continuity of operation. Most lenders require monthly payments. As mentioned, your financial health will determine your capacity to return your monthly loans. A shorter payment duration may be viable for those confident of seeing a flow of cash within a brief span. Meanwhile, a longer payment duration will suit better for business types that return takes a long time.
- Financial institution – if you have a business account or other form of credit account with a specific financial institution, you may have a greater chance of securing a loan with the same organisation which may offer better terms. You may also work with lenders specifically targetting your business type.
Most tapped business loans
Subsequently, familiarise yourself with some of the most tapped business loans. You may choose which one is most appropriate for your strategy:
In a secured loan, a creditor requires the borrower to pledge collateral. Usually, it is a physical asset such as a car, equipment or property. The collateral serves as a safety net for creditors. Once you fail to repay your debts for one or more obligation period, you automatically lose your asset. In addition, it can cause harm to your credit rating.
- The interest rate for secured loans is usually lower. Secured collateral makes the loan less risky for the lender compared to unsecured loans and other credit products. As such allows for more leniency in terms of payment rates. Interest rates of secured loans in the United Kingdom could stand as low as 3.57% for a minimum borrowing of £100,000. As such as the case with Paragon Bank.
- Secured business loans usually have longer payment terms. Aside from higher rates, a payment for a loan can stretch up to 30 years.
- Secured business loans offer more credit than unsecured loans. They often exceed £500,000. Typically, the banks are providing these loans. Usually, the high-street ones that are more cautious of problems that may arise in the future. As such, only businesses that have already proven themselves capable of profitability are likely to get approval. Companies show their profitability through management accounts, audited financial reports, business plans and other documents the creditor require for submission.
- Requires an asset to pledge. When reviewing collateral, lenders also take into account the ease in liquidating these assets.
- Enforcement will result in losing the assets pledged if you default. The consequences are more difficult to face if your business relies on these assets, say, a piece of equipment or land holding as its main equipment to operate the business and as headquarters, respectively. Pausing trade activities diminish the prospect of re-generating revenues to get the business back on track.
- The collateral market value will likely exceed the loan size. The excess means you may be giving up more than what you borrowing. In some circumstances, selling the asset may be more prudent.
Although unsecured loans can be attractive to those unwilling to pledge an asset or those who do not possess sufficiently valuable assets that qualify as collateral, lenders offering this type of
Lenders do not allow borrowing without a mechanism to seize a delinquent borrower’s assets.
- Unsecured business loans may be faster to obtain. However, lenders will still look at your credit score to assess your financial capacity. There are higher chances of approval if you get the higher the rating.
- Increased lending capacity. Typically an unsecured loan is in addition to secured lending increasing working capital available.
- Business and even personal assets are still at risk. Courts in several jurisdictions allow financial institutions to recoup losses and legal costs of doing so through taking possession of both business and personal assets of the business owner or owners that provide the guarantees. However, unlike secured-loans where the seizure of assets is automatic and immediate, debtors have more time to resolve the issue without leading to legal proceedings or insolvency. This leeway comes from the fact that creditors first have to obtain a court order allowing them to take away a debtor’s assets or multiple assets whose value will be equivalent to the unpaid debt. In the United Kingdom, securing a court order could take six months.
- The credit limit of unsecured loans is usually lower than that of secured loans. The loan credit may not suffice for your loan requirement.
- Unsecured loans have higher interest rates than secured business loans. it means your business may have difficulties in paying the loan in the long term.
- Because it is riskier, fewer banks offer products under this type of borrowing. Alternative financial sources and government usually provide this financing option while ensuring that the product will be easily accessible to startups.
Startup/ small business loans
Innovation is vital to a business. For startups, they are swarming and tightly competing against one other to capture attention from the market.
However, several studies show that the challenge of a startup business is realising their potential. Thus, high barriers to financing as these types of businesses are high-risk to lenders; startups often have no credit history to back their rating and have no collateral to offer.
Nevertheless, several institutions in recent years realise that the appetite for starting up a business is only growing. Someone had to fill that demand by offering small business loans.
Today, there are a variety of startup loans and small business loans.
- Startup or small business loans are typically unsecured-loans. Securing a loan presents a few obstacles. The difficulty increases for those who have a bad credit score. Bad credit scores convey how often a borrower missed loan payments or if they
- Repaid previous debts. Startups may not even have a credit rating as they are still establishing the business. Fortunately, there are alternative financial lenders. They focus more on the strength of your business than on your personal credit score. As such, they look instead at your annual revenue, operating years and history of bankruptcies.
- Faster decision making. Several lenders, including in the UK, carry the slogan of being able to slate a decision on your loan application within a day. Primarily, most application processes for these small business loans are done online. Thus the non-regulation status is an advantage for lenders to allow for more flexibility in the loan application process. They veer businessaway from traditional loaning’s application and approval processes which could stretch for months.
- Small or startup business loans tend to have a higher interest rate because of the risk of funding early-stage business. Traditional funding’s highest average rates reach over 8 per cent. Meanwhile, small business loans’ interest rates could total as much as close to 12 per cent.
- Small business loans are unregulated by state governments. This gives them leeway to conduct business in any way they want to. It provides some flexibility for their lending policies. Consequently, you may find yourself in a sticky situation if you have challenges with the way they conduct business.
Only a few banks offer startup loans. Because of this limited selection arose more innovative financing options for startups, from angel investing to crowdfunding methods. Meanwhile, some governments have also stepped in to offer loans to startups and small businesses.
A flagship startup business loan project of the UK is offered through Startup Loans Co., a subsidiary of the British Business Bank. Startup Loans UK can lend up to £25,000 with a fixed rate interest rate of 6% per year, to be paid over a minimum of one year and a maximum of five years.
Hence, companies can access these loans in operations for less than 24 months. Besides, the UK-backed Startup Loans also provide 12 months of free mentoring where approved borrowers can get insights and tips from experts on writing a business plan and on making a business grow.
The program has so far backed lent at least £464 million to about 60,980 businesses.
These loans are delivered through network-partner-countries such as Scotland, England, Wales, and Northern Ireland.
The British Business Bank, a state-owned economic development bank established by the UK Government, also launched in November 2018 a program which shells out up to £150 million as UK small business loans. All this will be coursed through Funding Circle, as well as through thousands of investors.
The loan amount is estimated to be capable of supporting more than 2,000 UK firms. Funding Circle claims that its online application process only takes 10 minutes and the waiting
won’t take long as decisions are typically slated in 24 hours. If approved, the requested funds arrive at your bank account within a few days.
Funding Circle offers loans of about £10,000 to £1 million, with interest rates starting from 1.9% per year and a payment term for over six months to five years.
Before securing a loan, you must fully determine what kind you need the most as banks offer many products designed for different needs. An effective way to identify your needed loan arrangement is by mapping out a comprehensive business plan.
A business plan should include the current business status; its financial capacity; targets, with deadlines; metrics and indicators to ensure you are on track; and strategies to hit these goals, among others. Targets should include revenues and profits built from, market share, efficiencies of scale and business expansion; data and other evidence to serve as a basis for the viability and profitability of these objectives.
Crafting a business plan involves lots of research. Inputs from experts both within and outside of your business will also help address likely obstacles to achieving your goal.
For startups who haven’t tested the waters, market research work may be more tedious and should be so; good things happen to those who move and decide based on reliable data.
A well-planned business strategy that you can confidently defend will significantly improve the prospects of your business. Decisions such as whether securing a business loan or reinvesting profits will become much clearer.