Business loans - what to look for

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Business loans - what to look for

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Why should you read this guide?

As with most businesses you will probably need to borrow money from time to time. It is important that you take the time to shop around and not simply go after the first loan that is offered to you. This guide will help you to find loans for your business and let you know what to look out for before signing the dotted line.

Background

Loans are one of the most traditional forms of lending and along with overdrafts are the most commonly used. Most business people are happy to take the first loan that is offered to them by a bank or other lender rather than shop around for the best deal. This is often one of the reasons businesses find themselves in financial trouble.

Where can you find a loan?

There are of course many sources of business loan on the market today. These include:

Banks - the most common source of loans are banks. It may surprise you that there are over 20 business banks operating in the UK and each of them deal with loans differently. You should not simply consider your existing bank when looking for a loan and talk to at least another one if not two.

Secondary lenders - If you have had some credit difficulty in the past you may be forced to look at the secondary market for your loan. This is often called sub-prime lending and it's basically providing loans to people or businesses that banks do not want to deal with. These companies are usually more expensive than the banks to counter the additional risk.

Family and friends - A good source for borrowing especially for business start-ups. You need to make sure that this is treated like a business transaction and the loan is documented detailing everyone’s rights and responsibilities.

Local government - Most business links, RDAs and business gateways provide loans of some sort to businesses. These tend to be "soft loans" which means that they are easier to get than commercial loans. They may also be offered on an unsecured basis. However, a lot of these are more expensive than bank loans.

Internet - A good source for loans is to look at the internet. Many of the broker sites now offer information on business loans available. If you decide to go own this route you should always try and find a site where people are commenting on loans from the company in question - if they are bad you will usually find some comment about them.

What to look out for

Interest rate - Most banks will offer a margin above base rate as the rate you need to repay. If you are offering security then this should be around 2% or less above base rate. Secondary lenders charge a rate per month and this can be anything from1.25% to 3% (a very expensive option). You should obviously look for the provider that is offering you the lowest interest rate.

Charges - you will be charged an arrangement fee for your loan. For a bank this is usually 1% of the amount borrowed for secondary lenders this can be as much as 2%. Look out for hidden charges like annual renewal fees or exit fees. An exit fee is a charge for when you move the loan away, usually charged by secondary lenders and is between 0.5% and 1% usually.

Security - What are you being asked to provide as security? If you are borrowing a small amount of money this should be done either unsecured or with a simple guarantee to cover the borrowing. Be very wary of any lender that asks you to put your house up as security if you feel this is unjustified.

Summary

There are a lot of loans available to you. Make sure that you take the one that is offering the best overall deal. If they suggest taking independent legal advice then do this - always speak to your solicitor and/or your accountant.

Further information

Look on the internet for more information about particular lenders. If you can then you should find an independent business finance company to work with. You can speak to your accountant about sources of loans but they will be unlikely to know much about companies outside of banks.