Small Business Loans

Financing a business is core to any business success. Capital is essential for business growth, while cash flow is a primary concern to keep a business on solid ground throughout its life. Unless your business has a significant investor behind it, it is extremely likely that it will need a small business loan at some point to be successful. 

Stepping into the world of small business loans can be nerve-wracking, but it’s actually a lot simpler – and friendlier – than it may seem. Read on for a complete understanding of this essential part of small business management, thanks to experts here at Cashflow Solutions. 

Small Business Loans in a Nutshell 

Not enough time to read our comprehensive guide? That’s understandable. Here are a few key points to take away: 

• A small business loan is money lent to your business that is repaid over time with interest. 
• Loans can be either unsecured or secured. Secured loans are tied to an asset, in a similar way to a mortgage being tied to your home and can offer better rates of interest and higher value loans. 
• You can use money from a small business loan any way you see fit. 
• Lenders will want to see your business accounts and other information to prove your business can repay the loan. 
• There is a range of different small business loan products to suit specific needs. 

• Cashflow Solutions are here to help you get the best small business loan for your company. 

What is a Small Business Loan? 

Business financing can typically be seen in three ways: 

• Loans – Money provided to a business that is paid back over time, typically with interest. 
• Grants – Money provided to a business that is gifted and doesn’t have to be repaid. This often comes from government or charitable institutions. 
• Capital investment – Money provided to a business from an interested investor for a share in the overall business. Capital investment provides a return for the investor based on the success of the business. 

As this guide is about loans, we won’t be looking at either grants or investment capital, but it is worth being aware of both options as you go forward to grow your business. 

What Counts as a Small Business Loan? 

There are many different types of loans available to small business ranged as selection of products. Loans are also available from multiple different sources – it’s not just banks. For example, all of the following can be considered considered small business loans: 

• Money borrowed from a friend or family member to support your business. 
• An overdraft facility provided to your business account by the bank. 
• Credit cards provided to the business. 
• Unsecured loans provided by a lender to the business. 
• Merchant cash advance loans. 
• Invoice loans. 

Each of these products work a little differently, but all have the same overarching principle – that the money provided is paid back over time, typically with interest. 

With a small business loan, the money is yours to use within your business as you see fit. They are used for a wide range of purposes, including: 

• Equipment 
• Marketing 
• Staffing 
• Paying bills 
• Physical expansion 
• Salaries 
• Research 
• Buildings 

Interest on Small Business Loans 

While not all loans generate interest (for example, money lent to your business by family members generous enough to not ask for interest on their repayments), all professional small business loans will incur interest during their lifespan. 

Interest is the incentive for the lender to provide the money – they will be getting back more than they put in. 

Interest rates are calculated based on many factors. These include the Bank of England’s base rate, your business’s credit history, the length of the loan, the products available from the lender, and more. It is impossible to say what the interest will be on most business loans until all the details of the loan are made clear, but getting as good a rate as possible is essential for the long term viability of the loan for the business. 

Remember too, that interest is cumulative, and that interest generated in the first year will have an impact on the remaining loan amount. Some loans are interest only, meaning that your repayments are just the interest being generated by the loan and the principal (the original amount borrowed) is not repaid until the very end of the loan term. 

Interest may be on a fixed rate for a number of years, meaning it will not change during that period, or they can be a variable rate. Variable rate interest on loans follows the lenders rate and may go up or down during the loan term. While fixed rate loans may have a higher set rate of interest at the outset, the security of knowing the repayment amount each month helps budgeting and accounting. Variable rate loans are slightly more of a gamble, as initial low rates may change significantly over time. Of course, variable rare loans may also decrease if the interest rate drops. 

It is essential that the interest is fully understood and considered when planning your small business loan. 

The Difference Between Secured and Unsecured Small Business Loans 

Loans come in two main types; secured loans and unsecured loans. For small businesses looking to borrow smaller sums for startup or early expansion, an unsecured loan is typical. More established businesses applying for loans to furnish growth may find a better deal with a secured loan. 

Unsecured Small Business Loans 

An unsecured small business loan is based on the company projections and credit history. There is no need to offer up any sort of security or collateral on an unsecured loan, but the lender will want to be sure that you are a viable business able to make repayments without difficulty. Unsecured loans for businesses often require a comprehensive business plan with the business accounts and forecast in order to provide the lender with all the information they are after. 

Unsecured loans are more risky for lenders and consequently, the interest rates tend to be higher than those for equivalent secured loans. Additionally, the size of an unsecured loan is typically lower than secured loan products. 

Unsecured loans for small businesses can be in the range of £1,000 to £500,000, with most at £50,000 or below. 

Secured Small Business Loans 

A secured small business loan is offset against assets or other securities of your business to mitigate the risk for the lender. If you fail to make payments on a secured loan then your assets will be seized. The most commonly understood secure loan is a mortgage, which is a secured loan with your home as an asset – failure to repay your mortgage leads to your home being repossessed. 

Secured loans for businesses come in a number of forms and include mortgages for business property, asset-based loans that may be tied to machinery or equipment for collateral, or invoice loans that are linked with accounts receivable, or the money that has been invoiced by the business but remains outstanding. 

Due to their lower risk, secured loans for small businesses have more competitive interest rates than unsecured loans, as well as longer terms for repayment, and often a more flexible portfolio. 

The size of a secured loan is calculated based on several factors, including your credit history and the value of your assets. These factors that determine the loan’s LTV or Loan to Value percentage; this number is the maximum loan size based on the asset value. For example, if you had £500,000 worth of assets and a LTV of 80%, then you would be able to borrow as much as £400,000. Companies with stronger credit scores will be able to command higher LTV loans, perhaps as much as 90%. A more standard secured loan would be be between 50% and 75% LTV. 

Loan Flexibility and Options 

Lenders are keen to offer their loans to businesses – remember, they are a company themselves with a product they are looking to sell. Consequently, small business loan products often come with a great deal of flexibility to suit your business as best as possible. 

One example of loan flexibility is in choosing the length of your loan term to best suit you. With a longer length of loan, the overall interest paid will be higher, but the monthly repayments will be lower, often allowing you access to a higher level of credit than a shorter term loan may provide. 

Another type of loan flexibility lies in the terms and conditions for making overpayments, or paying the entire loan back early. Some loans will have an early repayment fee that is designed to offset the loss of interest to the lender, while others will waive this fee as an enticement that businesses choose this more flexible loan. 

Still more loans offer refinancing or extending your credit should you need access to more funds midway through the loan. 

When choosing a loan for your business, it is worth considering all these additional options to select a final loan product that best suits your needs. 

Loans and Liability 

It is very important to always make your loan repayments and failure to do so can lead to legal debt recovery action, the seizure of assets, and insolvency. 

However, small business loans are tied to your business and may not affect your personal finances as follows: 

Small Business Loan Liability for Limited Companies 

If your business is a limited company, either LTD or LLC, then you are protected from personal liability regarding small business loans. 

This means that should the business fail to make repayments, the debt does not fall to you to personally repay. 

Making payments is still essential, as the company’s failure to pay its creditors will lead to legal action and ultimately the business facing insolvency, however, your personal assets, such as your family home, are safe. 

Some lenders may ask for a personal guarantee or collateral on a small business loan. Loans of this nature are an exception to the above rule and you will be personally liable to make the repayments. 

Small Business Loan Liabilities for Sole Traders and Partnerships 

Both sole traders and partnerships do not have the protection of a limited company to distance their personal liability for any small business loan. Thus, all lines of credit and the repayment of them falls under the responsibility of the individual or partner. 

Failure to repay a small business loan if you are a sole trader or a partner could result in personal legal action and your personal assets (such as your home) may be at risk. 

For this reason, it is worth considering becoming a limited company before looking for a small business loan. 

Government Support 

The UK Government provides a range of support for small businesses looking to grow their companies, including guarantees for lenders to improve the range of credit available. These include schemes such as the Recovery Loan Scheme (RLS). For a full range of government small business support visit gov.uk.  

Preparing for a Small Business Loan 

In order to get a small business loan, you will need to show the lender your credibility and viability as a company. This may include some or all of the following: 

The Business Plan 

The first stage for many in obtaining a small business loan is to create a strong business plan. This document lays out your ideas for your business and contains accurate financial information and forecasting to provide the lender with a clear understanding of your business. 

While most business owners understand the need to create a business plan at the very start of their business, especially to gain access to any startup funding and loans, many forget to return to this document as time goes on and it becomes dormant. However, an up-to-date business plan is a strong asset for your company and if it is added to and expanded as your business expands, provides a first port-of-call for any loan application. 

The Loan Proposal 

Similar to the business plan but often shorter and with less detail is the loan proposal. This document details the need for the loan and the proposed use of the funds. It should also show how the company is strong enough financially to make the loan repayments through the term of the loan. 

If the loan is a secured loan, then the loan proposal document needs to clearly list the assets that are to be used as collateral, as well as a current valuation. 

Company Accounts 

A clear and concise presentation of the company accounts is essential. This should include your most recent tax returns, current cash flow, accounts payable, and forecast. 

It is best to have your company accounts compiled by an accredited accountant or bookmaker to make sure every aspect of the accounts is detailed correctly. 

Your Credit History 

Like with a personal loan, a small business loan is governed by your credit score and associated history – and many of the same rules apply. If you have been struggling to make payments on other lines of credit, then your credit history will be poor. It is worth spending three to six months boosting your credit score prior to any loan application. 

Your credit history will be a major factor in any unsecured loan, and will be considered for secured loans, often determining the size of the final loan value. 

Insurance 

Creditors may want to see appropriate insurances in place, especially for secured loans tied to assets. Make sure your insurance is up-to-date and fully covers any relevant assets. 

The Different Types of Small Business Loan 

There are a wide range of small business loans available, of which the main ones are: 

Short-Term Loans 

A short-term loan is anything which is paid back within two years; often as short as a month. Short-term loans tend to have a far higher interest rate than longer term loans, but can be quick and easy to obtain. 

Short-term loans tend to be unsecured and may require a personal guarantee. They are good for quick injections of cash into the business if you are confident in your ability to repay them in good term. 

Pro: Quick and easy to get. 

Con: High interest rate. 

Mid- to Long-Term Loans 

A long-term loan is defined as anything with repayment terms over three years, while those from one to three years are mid-term. Many long- and mid-term small business loans are unsecured loans. There is a huge range of products available in the mid- to long-term loan category, with funding available from £1,000 to £15 million depending on the size of your business. 

Long-term loans are typically the loans most considered when thinking about small business loans. 

Pro: Wide range of products available. 

Con: Overall interest paid can be significant. 

Overdrafts 

While an overdraft on your business bank account isn’t often considered a loan, it does fall under the category of short-term small business loan. Overdrafts offer a continuous line of credit that, if managed well, can help your company through dryer and difficult patches. 

Pro: A revolving line of credit that’s easily obtained. 

Con: Typically small amount of funding. 

Company Credit Cards 

Like an overdraft, a company credit card is a continuous line of credit to help your business. Credit cards tend to have higher interest rates than other loans but are incredibly flexible and often have other benefits, such as insurance on purchases. 

Good credit card management is an excellent way to build a strong credit history. 

Pro: Another easily obtained line of credit. 

Con: Easy to mismanage. 

Asset-Based Loans 

An asset-based loan is a secured loan where company assets, such as equipment or machinery, are used as collateral. Asset-based loans often have lower interest rates than other loans and can provide a substantial level of credit for companies with considerable physical assets. 

Pro: Low interest rate. 

Con: Assets are at risk. 

Working Capital Loan and Invoice Financing 

A working capital loan is a type of business loan specifically designed to finance a company’s day-to-day operations and cover its short-term operational needs. It provides your business with the necessary funds to manage their cash flow, pay for operating expenses, purchase inventory, cover payroll, and meet other operational obligations. 

Working capital loans are typically short-term and exist to bridge the gap between business expenses and expected income. Invoice financing is a specific type of working capital loan where the value of the loan is dictated by the accounts payable, or outstanding invoiced amount awaiting payment. 

Overdrafts are another subtype of working capital loan, providing a short term injection of cash to cover overheads until money comes into the business. However, they are seen as weak when compared to other types of working capital borrowing due to their relatively low lines of credit. 

Pro: Flexible financing to help businesses in difficult patches. 

Cons: Fees and interest rates can mean a long-term loss for the short-term benefits. 

Corporate Mortgages 

When looking to buy a building for business use, a corporate mortgage is used. Like residential mortgages, corporate mortgages can be interest only or repayment mortgages and are typically long-term loans spread over ten years or more. 

Mortgages are a type of asset-based finance with the building listed as collateral.  

Getting the Right Small Business Loan 

With such a huge range of products and lenders on the market, getting the right small business loan for your company can be difficult. With a strong public face and considerable renown, high street banks are often the first port-of-call for those looking for a small business loan, but they can be a poor choice – with more stringent criteria for lending, or with higher interest rates than some alternatives. 

Alternative lenders, peer-to-peer lending, and government lending all offer options for the discerning business leader in addition to the traditional banks, and in some cases provide far superior small business loan solutions. 

At Cashflow Solutions, we have the expertise needed to guide you to the lender and financial range of products that properly fits your business requirement. We are here to help you wade through the mire of options to get the financing you need. Contact us today to talk to one of our experts and let us help you expand your business. 

Working in partnership with our lending partners backed by the British Business Bank to deploy funds to support business growth and working capital

• Our connections to funders are second to none.
• We will use our experience to select the right lender to approach on your behalf
• We conduct diligence on each application before it goes – we like to answer the lenders questions before they ask them.
• We will produce a short credit paper which will go alongside your application.
• We can produce the cashflow for you in a format that will be acceptable to the lender
• We will ensure that your application is supported by all the key documents needed – if you make it easy for the lender it will cut days off the process and increase your chances of approval.