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How to Get a Business Loan in the UK?

If you're planning to grow your business by acquiring new premises or equipment or investing in recruiting as well as marketing strategies, you could consider getting a business loan.

To help you decide if an unsecured business loan is the best option for you, we examine the different types of loans, what you'll need to do to get one, and what alternatives are available also answer the most frequently asked questions regarding business loans.

How to Get a Business Loan in the UK?

What is a Business Loan?

The business loan can be described as a type of credit for commercial enterprises instead of individuals. Some are more appropriate for businesses that are just starting out, and others are appropriate for businesses that have some amount of years of filing accounts.

The amount borrowed in installments of monthly payments over a specified period of time, and pay additional interest added on top. In general small business, loans can be found in sizes ranging from PS1,000 to possibly millions of dollars.

How Do Business Loans Work?

When you get a business loan, you must apply and tell the lender what it is for. Just like applying for a personal loan, you must provide the lender with proof of your income and your intent to repay the loan.

You can choose the period you have to pay. Typically, you repay it over a period of between 1 year and 30 years, depending on whether you opt for a medium or long-term loan. Payments and interest rates are usually fixed over the life of the loan.

Are Business Loans Secured?

Business loans are secured or unsecured. Secured loans are those which is tied to an asset like a vehicle, property or stock. That means that in the event that you are unable to make your payments the lender could use your assets in order to repay the loan. Because there's less risk for the lender secured loans are generally larger and interest rates tend to be lower.

Unsecured loans don't need any asset to be secured, therefore they tend to be smaller amounts and have greater interest rates. Unsecured loans might be more suitable for small-sized businesses that don't have big assets. Some lenders require an individual guarantee from the company's director to secure an unsecured loan.

Is It Possible to Start a Business With A Personal Loan?

Business loans are secured loans designed specifically for businesses. However, getting a business loan to start your business can be difficult as most lenders want you to provide two annual statements when you apply.

If you don't have a business loan, you can use a personal loan to start a business. When applying, the lender will ask what you want out of the loan, so before applying for a personal loan, it's worth checking if starting a business is a valid reason. Otherwise, you risk rejection.

What Types of Business Loan Are There?

The most popular kinds of business loans are:

Bank Loan

Through a business loan from a bank, You'll take out a predetermined amount of money from a building society for a specified amount of time and pay interest.

Government-backed Start Up Loan

It's a personal loan that is backed by the federal government to begin or expand your company. For this kind of credit, one has to reside in the UK and be over 18 years old and be operating (or are planning to start) a business from the UK, and have operated in less than 24 months.

Start-Up Loans have a fixed rate of interest of 6%. They're in the range of £500 up to £25,000. you are able to repay your loan in a time that ranges from one to five years.

Short-term Business Loan

Business loans for short-term duration are targeted at businesses that want to borrow for just a short period of time, not years, and do not want to be bound by long payments. They may be spread in the form of weeks or even months. They do have higher interest rates than other loans. Therefore, be sure to know what they are.

Peer-to-peer Business Loan

Through a peer-to-peer loan (or P2P) the borrower will take funds from investors who are private, rather than banks. It is common to match these investors via the internet via an intermediary. There may be fees to obtain the loan, therefore pay close attention to any charges, fees, and interest rates prior to committing.

Cash Advance

The cash advance loan for businesses (also called the merchant cash advance) permits you to get money to cover your company's future debit or credit card sales. The amount you pay each month is based on an agreed-upon percentage of the sales you make with your cards which means you'll pay more when your business is performing well, and less when it's not.

Invoice finance

This is when a loan provider makes use of your invoices that are not paid as collateral to loan to you. There are two major types of invoice financing:

  • Invoice Factoring is in a position to borrow a portion of the number of your invoices. The lender will take payment directly to your customer. In turn, the lender is going to pay its expenses and you'll be paid the remainder.

  • Invoice Discounting, which lets you take out a loan against the number of your invoices. However, you'll be able to collect funds from your clients and pay the agreed amount.

How Do You Decide Which Type of Business Loan To Apply For?

If you are thinking about applying for a business loan and deciding on the type of loan to take out You'll have to consider:

  • How Much Money Do You Want to Borrow?

  • Which types of loans are best suited to your particular business model? Some loans, such as Start Up Loans are only appropriate for businesses that are just starting out as well as cash advance business loans are ideal for businesses that make some amount of income through card transactions

  • The amount you are able to repay each month considering an interest rate in consideration

  • The amount of time you'd prefer to borrow the money and the amount of time you'd like to take it out. Although it might be tempting to take the loan for an extended period of time, you could pay more in interest

  • Comparing the costs and fees on each loan you're looking at.

  • It is important to evaluate your options and explore your options before you commit to any lender or an option taking a look at the overall cost of borrowing.

Should I Choose a Long-Term Business Loan or A Short-Term Business Loan?

When you repay the loan depends on your business and your finances. Long-term loans usually have lower monthly payments and lower interest rates. But you're paying it off over a longer period of time, so you're typically paying more interest. You can also limit your monthly cash flow.

It is usually more difficult to approve a long-term loan because of the greater risk that your financial situation will change.

Apply for a Business Loan in the UK

Applying for A Business Loan

Before you submit an application for a business loan you'll have to be certain about:

  • The amount you'd prefer to take out

  • What are you borrowing the money for

  • How much can you afford to pay back each month

  • How long it will take you to pay back the loan

Like other loans, your company's credit score is likely to be assessed, and more attractive loan terms are available for those who have an excellent credit score.

A few ways to boost your company's credit score include:

  • Reviewing your credit report and resolving any mistakes

  • Invoicing on time

  • If you're a limited company that is a limited company, you must file full, not abbreviated accounts to the companies that house them.

  • Be sure to have enough money in your bank account for any future payments

  • You should only apply for credit only when you really need it. The number of applications you submit indicates that you are in financial trouble. You can request an estimate instead.

  • Keep all your personal information including your address for business, current. Inform your suppliers, as the company's house of any changes

  • Avoiding court judgments from county courts (ccj) since they are included in your credit file.

You could also be required to submit proof of your company's accounts statements from banks, bank statements, information on loss and profits, and tax returns, as well as an outline of your business plan, along with proof of address as well as IDs of directors of the company.

Once you've gathered all the necessary documentation and decided which type of business loan is most appropriate for your needs, you are able to search around before submitting an application.

Can I Apply For A Personal Loan?

Peer-to-peer (P2P) lending is relatively new to business lending, but it's an option many people turn to when they need extra cash. They work with lenders or investors who lend their money to small businesses. It could be one person lending you money or a group of people lending you a small amount.

The lender collects interest on the loan, and the small business then pays it back as if the loan came from a bank. This is a good idea for businesses as they are often more likely to get financing than going to the bank.

However, there are some risks for borrowers, such as the fact that P2P lending is not yet fully covered by the Financial Services Compensation Scheme (FSCS). This means that if a P2P lending platform goes down, it can be difficult for borrowers to get their money back. However, most P2P platforms have taken strict measures to prevent this.

Comparing Business Loans

When looking at loans, crucial elements to consider are:

  • To determine if you're suitable for the loan you're thinking about. Be sure to verify the requirements of the lender thoroughly prior to submitting an application

  • The interest rates for the loan, and if they're variable or fixed. It is important to note that Representative APR implies that either rate or less rate, is available to at the very least 51% of the applicants, therefore 49 percent of applicants are likely to receive a better rate.

  • If the loan provider you choose to work with provides a payment holiday (a couple of months to pay). But, taking an absence from payment could mean it will take longer to repay the loan, and you'll have to pay more interest over the long term.

  • the early repayment fee on the loan.

Alternatives to Business Loans

If you're not convinced an entrepreneur loan is a right choice appropriate for you, you have alternatives, including:

Credit cards for business - if you're seeking to get a loan for smaller amounts then a business credit card could be a good choice. It is possible to enjoy an interest-free timeframe for your purchases. Be sure to make sure to pay your balance in full every month to avoid fees or charges. You should also determine what the annual cost and interest rates will be after the 0% rate.

Crowdfunding is a way to attract investment by presenting your idea online with the intention of remuneration for investors you have attracted. You could offer to sell a part of your company through crowdfunding for equity or offer rewards like free goods or tickets to rewards crowdfunding.

Overdrafts: Your business account could have an overdraft that is either interest-free or low APR. It's usually only good for small amounts, however, it is important to verify the terms of your overdraft and adhere to them.

How Much Can I Borrow With A Business Loan?

You can typically borrow between £1,000 and £3 million when you take out a commercial loan. However, this depends on your business situation and credit rating. It also depends on the type of business loan you are getting and the length of time you want. Make sure you can afford to pay and consider what you will do if your financial situation changes.


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