Understanding commercial business loans

Breaking down everything you need to know about business funding.

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There are times in the life of any business when it may need an extra boost to help cover costs. This is where a commercial business loan can help. A business loan is a form of funding for commercial organisations rather than for individuals. There are lots of different types available and lots of different providers that you could consider.

Let’s take a look at how business loans work, what types there are and how to apply for one.

How do business loans work?

A commercial business loan is a type of loan designed for an organisation. The amount that you can borrow varies from anything between £1,000 and £3 million. Similarly, the period of time over which you borrow money can vary wildly, but business loans are typically categorised as short or long term.

Finally, there are many types of business loans, but they usually fall into one of two categories: unsecured or secured. An unsecured business loan allows your business to borrow money without you providing any sort of asset as security. A secured business loan requires some sort of asset in order to borrow the amount needed. If, for any reason, the business is not able to pay back the loan, this asset will then be sold so that the lender can recoup its money.

What types of business loans are there?

As mentioned above, you can get short- or long-term business loans that are secured or unsecured. But within these overall categories there are many different types of business funding.

Bank loan – This is a business cash loan offered by a bank or building society. Like a personal loan, your business borrows a lump sum and pays it back over a set period of time. This type of loan typically requires a director’s guarantee, under which the director will be personally liable if the business is not able to pay back the loan.

Asset-backed loan – As a type of secured loan, this loan requires the business to provide an asset as security. This could be something like stock, land, machinery or property.

Revolving credit facility – This type of funding allows businesses to borrow money as and when they need it. The business only pays interest on money it withdraws, and it can be repaid as soon as funds become available.

Peer-to-peer lending – This type of lending is usually facilitated through an online lending platform. Businesses can borrow money from investors looking for a return on their money.

Invoice finance – With this financial product the lender ‘buys’ any outstanding invoices your business has, releasing the money the business is owed by customers.

Cash advance – This is a type of loan where the business borrows money against its future credit or debit card sales.

Start-up loan – If you are a new business, then specific start-up loans are available to you either through the Government backed initiative, or with providers such as Virgin Start Up.

How do you apply for a business loan?

Applying for a business loan is slightly more complex than getting yourself a personal loan, and involves quite a bit more paperwork.

Where to apply for a loan depends on what type of lending you are after. Some business loans are provided by high-street banks or building societies, while some require more specialist lenders. As for mortgages or insurance, there are also business loan brokerage services available.

To apply for a business loan, you typically need to be a registered company director. Other basic eligibility requirements include being 18 or over, a UK resident and not bankrupt or in a debt management scheme.

When making a business loan application, you are likely to be required to provide supporting documents. These include a business plan, a cashflow analysis, details of your business account and a profit and loss forecast. It is also likely you will need to have a meeting in person with the lender before your application is approved. This will depend on which provider you have chosen.

While the process may seem complex, a commercial loan can be a relatively inexpensive way for any business to borrow. The money can then be used to get the business off the ground, ease cashflow issues or even fund expansion.  

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