Loans / Loans

Loans
A loan is for a fixed amount with a fixed repayment schedule.  Term loans are most suitable for funding fixed assets and core borrowing.  Although the interest rate may be slightly less than on an overdraft there is no opportunity to flex the amount of financing.

When the level of financing required is likely to go up and down it is important to choose a form of finance that does not require you to pay for funds you are not using.  Therefore, a term loan is suitable for financing fixed assets but not working capital.  The term of the loan should not generally exceed the expected life of the asset it is financing.

The key advantages of a term loan are that you know what the repayments are and can budget accordingly and the APR may be lower.  Banks generally attach various terms and conditions (covenants) to granting loans that must be complied with throughout the term of the loan.  The Small Firms Loan Guarantee Scheme guarantees loans from the banks and other financial institutions for small firms that have viable business proposals but who have tried and failed to get a conventional loan because of a lack of security.

Banks, accountants and your local Business Link will be able to help you decide which is most appropriate for your business needs, or whether an alternative source of finance should be considered.

What level of interest should I expect to pay on a bank loan?
This will depend on how the lender assesses a number of factors affecting the business.  Relevant factors might include the purpose of the loan, the strength of the borrowing proposition, the nature and level of risk involved, the amount of security the business can offer, whether the business has other sources of finance to draw on and the strength of the management team.

Generally you should expect to pay base rate plus a margin for the bank (around 2.5% assuming a low risk venture), plus an additional premium based on the specific circumstances of the business proposition.  It is advisable to shop around to find the best and most appropriate deal.  You should consult your local Business Link, accountant, or existing personal business adviser, to present your application in the best possible way.

The banks are the largest providers of loans and overdrafts in the UK and they will generally secure their loans and overdrafts against the assets of the business.  The banks offer a number of ways to help you manage your cash flow and the costs associated with loans and overdrafts such as fixed interest rates, interest collars and interest caps.

The banks have turned me down for a loan for my business.  Where can I get help?
There may be many reasons why your loan application has been turned down, and a personal business adviser can help you decide how best to proceed.  If you do not have a personal business adviser then we advise that you contact your local Business Link.

If the reason you have been refused a loan is because you have no security to offer a lender or because yours is a new business without a trading record, you might qualify for help through the Small Firms Loan Guarantee Scheme.  This encourages the banks to make loans to businesses they would otherwise not lend to, by providing a Government guarantee against default by the borrower.