Understanding and arranging a business loan

Understanding and arranging a business loan

At times all businesses will need to borrow money, whether it’s to start a business or for expansion or investment. In the start up phase you may need finance to cover the day-to-day expenses when you are developing a new product or service, or for equipment and premises or when marketing you business. A business loan can be used to finance these costs prior to your business generating enough cash to cover them.

Business Loans

Business Loans are appropriate for more long term funding, this guide will help you to understand and arrange your business loan.

There are a variety of different business loans available and the cost and flexibility of these loans will vary. This is in addition to an agreed overdraft, which allows you to borrow money quickly from your bank when you need it. You will usually pay a fixed fee for the borrowing facility and interest on the amount you borrow. Some loans are secured –when buying fixed assets and commercial property and other loans are unsecured when no security is available.


High street banks and other lenders offer commercial business loans, but ensure you look around for the best deals and be aware of any hidden charges, potential penalties, charges and fees. Make sure you ask the potential lender to provide you with all these details before you sign anything.

Interest Rates

With a business loan the money you borrow will be repaid over a pre-agreed time frame at a fixed, variable or capped interest rate. With a fixed rate loan you know exactly how much you need to repay, for the duration of the loan. With variable loans the amount you need to repay will fluctuate over time with the Bank of England base rate. ‘Capped’ interest rates allow you to benefit from the falls in interest rates and the rates won’t rise above the agreed level for the capped period.

Prior to arranging your business loan, identify exactly how much money you need to borrow, and what you need the money for. If you need the loan for the start-up phase of your business or in the early stage of the business getting a loan can be difficult, to improve your chances of getting a loan, define your income streams, therefore you will be able to persuade the lender the lend you the money.

The timing for applying for your business loan is also crucial, if you apply too late your business may suffer, and if you apply too soon, you may be left paying unnecessary interest payments.

Lenders will look to finance the business on a partnership basis and will expect you to also contribute. They will also want a form of security from you for the loan; this may include a personal guarantee which means that if the business can not afford to pay the debt you will personally be responsible for repaying it.

The rates and amounts for business loans differ depending on several factors such as whether you have:

  • A clear and rational business plan, which shows projected and realistic cash flow
  • Personal and business assets which can be offered as collateral
  • A good credit rating
  • A profitable business and you can demonstrate your trading history
  • Invested a stake in your own business
  • Fully understood your market

You will need to make a presentation to the lender, so make sure you practice it, most business loans are turned down due to poor presentations and business plans. Finally shop around for the best deals and don’t be put off by being turned down.

For further information about business loans please contact our advice team on 0800 597 4757 or apply online using the form opposite.