Several kinds of business loans are available to help small businesses get off the ground or provide a cash injection to an existing business. But how do you know which business loan is right for you and your small business? We're going to tell you all about that in this post.
Choosing the right business loan, and the right lender, ensures that you get the best deal. There are a number of factors to consider when choosing a loan for your small business. Let’s explore them.
The amount you want to borrow will affect the repayment terms, interest rates, and other important conditions placed on your loan.
In need of a large sum of money? You may need to produce a deposit before you're granted a loan. Think carefully about how much you need to borrow. Don't underestimate the amount of money you will need, as it could be much more challenging to secure a second loan if you discover that you need more money.
Flexible loans offer variable or capped interest rates and a repayment structure tailored to suit the needs of your business. Fixed loans commit you to a specific repayment schedule and fixed interest rate.
While fixed loans can give you the security of knowing exactly how much you will need to repay, flexible loans can often work out more cost-effective.
Before deciding between a flexible or fixed loan, weigh the advantages and disadvantages of both loan types.
The length of your loan repayment plan will depend on the size of your loan.
Small loans may need to be paid back within the first 12-24 months of trading, while larger loans could take up to 15 years to pay back. The longer the length of your repayment plan, the less you are likely to pay for your regular installments.
But what if your loan repayments are spread over several years? In that case, you may incur ongoing charges or added interest rates, making it more costly in the long run.
Unsecured loans will usually have higher interest rates. That's because lenders have no guarantee the money will be repaid. For this reason, unsecured loans are only given for small amounts.
On the other hand, secured loans (loans secured against an asset, such as property) offer the lender a form of guarantee that they will get their money back. For larger loans, it's usually necessary to provide an asset as security.
(By the way, if your business is cash poor but customer rich, this is one post you won't want to miss next!)
Sole traders and partners will be personally liable for the repayment of a business loan. This is true regardless of the success or failure of any business venture. It’s essential to consider the legal and financial implications of taking personal responsibility for a business loan.
After all, it could lead to the loss of property, assets, or personal possessions.
Choosing a reputable lender regulated by an official body is the best way to protect against scams and dishonest selling tactics. Whether you choose to use a bank, building society, or other lenders for your business loan, check their credentials thoroughly before applying.
(Learn more ways small business owners can take financial control in this article)
Before making a final decision about your loan, compare terms and repayment plans with other lenders. Ask for a written quote from as many different lenders as possible, as this will help you compare their offers. Always read the small print and check for any penalties and extra charges that you may incur.
Take your time and make sure that you have chosen the best deal to fit your needs and circumstances.
Is your small business also in need of professional bookkeeping services? We should talk. Use this form to get in touch.
Here are three posts to read next:
Why Investing In Bookkeeping Is Like Buying The Roadmap To Your Success
5 Ways for New Business Owners to Take Financial Control
3 Things You Absolutely Need To Consider When Hiring A Bookkeeper
This post was first published in 2013, but it was updated in 2021 just for you.