The amount of money you have in your business account today is arguably the most important business metric for any company. Sometimes, cash flow can be tight because customers are paying you late and your staff need their wages right now. You might be trying to figure out how to expand with the cash you have available and struggling to work out how you'll pay for your plans.
Doing everything you want or need to do with the money your company has in the bank isn't always possible. If that's the case, it may be time to consider taking out a business loan.
Business loans can be used to tide your company over any temporary problems that it might be facing but they can also be taken out to advance your business to the next level as well.
Whether your business needs cash because there's been a lull in sales or you need it so that you can purchase new equipment because you're growing and you need more capacity, you'll need someone to help secure that finance.
Your first reaction might be to head to a high street bank. Unfortunately, they aren't much help to businesses looking for funding. Why? This is still a service that they provide but the lack of flexibility, options, and support which characterises the types of commercial loans banks offer puts many business owners off doing so. They're also still famously risk-averse following the crash in 2008.
If you need finance and the banks just aren't interested, you should consider going through a commercial loan broker. When you submit an application for a business loan, a broker will present it to the companies on their panel of lenders who they know will be interested in finding out more about your proposal. Using a broker also cuts down on the time you need to take to secure a finance package that is tailor-made for your business.
In this article, we explain what a business loan is, how they work, who gets them and why, and why you should consider getting one without going through a high street bank.
What is a business loan?
Business loans are loans that you take out solely for the use of your business. They work in a similar way as taking out a personal loan in that your company, the recipient of the loan, approaches a lender and, between you, you agree on how much you want to take out and for how long. Then you discuss the interest and repayment period. Once all of this is agreed upon, you are good to go.
The money will be transferred into your bank and you will repay that amount (plus the interest) over the timescale you had agreed.
You pay back the capital and interest on a business loan, just like a personal loan
All business loans are amortised. What this means is that the amount you repay covers two things - your "principle" and your "interest". Principle is the actual debt that you owe, and the interest is the amount you pay the lender for access to the money.
With an amortised loan, the amount of interest you pay on each repayment goes down with each successive payment while the amount of the principle you pay back is at its lowest on the first repayment and at its highest on the last repayment.
Why you should consider getting a loan:
Why would you want to take out a business loan? Every business has its very own reason behind making the decision to go for finance and yours will have its own too. But what are some of the key recurring reasons business owners look for a loan?
Planning an expansion
Business loans are often taken out for expansion, the two main types of expansion being:
You might have outgrown your office or shop. This is part of the growing pains of any business, but despite your increasing turnover, finding the money to pay for an expensive move from cash flow can be challenging.
You will have a deposit to pay on your new premises as well as a four-figure legal bill to make sure you're getting the best possible terms on your lease. There may be new furniture, fixtures, and fittings to buy and install. There'll be rent overlap (the remaining rent you have to pay on your current premises until the break clause you trigger comes into effect), the cost of moving out of your old premises, and, of course, a day or two's worth of lost business while you get your new place set up.
Expanding your workforce to sell and service more customers
Taking on new staff to sell and service more and more customers is an exciting time to be in charge of a business but doing this will significantly increase your business's fixed costs.
Hiring new sales reps, customer service staff, labourers, and more is essential to continue to meet demand for your products and services and look after your clients post-sale. However, you may need financial assistance to pay for this expansion while your company sets about creating the additional sales required to break even and make a profit each month.
Investing in working capital and cash flow management
Working capital loans are there to cover your short-term cash requirements. They can be used to pay staff wages, rent demands, and even settle PAYE, corporation tax, and VAT if the money is not there at the time it's needed.
Taking out a working capital loan does not mean your business is in trouble. They're often taken out if there has been a temporary dip in sales, an unexpected bill (like a demand from your landlord in excess of what is left in your sinking fund), or your credit department has had trouble securing payment from customers. The businesses taking them out are fundamentally profitable and sound but they're facing one or more temporary challenge they need to navigate through.
Investing in equipment
Your business may be reliant on aging technology that breaks down far too often. When your machinery breaks down, orders can't be fulfilled on time, invoices can't be issued to your internal schedule, yet you still have to meet all of your fixed costs.
Alternatively, your machinery may be brand new but a sudden spike in sales means that you're working past full capacity and profit margins are dipping because of overtime payments to staff. An equipment loan will give you greater capacity to meet and fulfil orders without the need to pay too much to existing staff to stay late to match your production requirements.
Why you should avoid high street banks
Many business owners who are considering the option of commercial finance will immediately think that the best option is to go a high street bank. However, this isn't always true.
What are some of the reasons that a high street bank might not be the right choice for you?
They are slow
For many businesses, getting a loan approved quickly is a priority - there is a near immediate need for the cash. Bank loans can take weeks to process and many of them require face-to-face meetings, phone calls, and paperwork that needs filling in.
If you are looking for money quickly, then this is often not an option available to you with a high street bank.
They aren't tailored to your business' needs
The best deals with the greatest flexibility are reserved for commercial banking customers. Commercial bank departments deal exclusively with businesses whose turnover is greater than £2m a year whereas those turning over less will deal with the retail business team.
The retail business team's decisions on whether to lend businesses is made by computer based on a strict set of variables - they have little or no ability to decide on giving you a loan based upon their own personal judgements.
Even if you are offered a loan, the terms may not be favourable and the bank may not be willing to lend you the amount you need.
You need a high credit score
Most retail business teams will only offer a commercial loan to companies which have their business accounts with them. If you're not a customer, they will normally not be willing to enter into a meaningful discussion with you unless you offer to transfer your account over to them. Sometimes, they may tie the decision to offer you a loan to accepting one or more of the bank's other services, particularly invoice factoring.
Business credit reports are very different from personal credit reports. When making the decision to provide a loan to a business, your business's credit rating will be the main factor considered by the bank's lending algorithms. If you have traded for two years or less, banks will routinely not lend to you because you've not had a chance to build a credit rating. If you've been trading for longer, more often than not, they will only lend to businesses with very high credit ratings and they'll often try to secure the loan against your home.
With a bank business loan, you need to make your repayments on a certain day and for a certain amount. Although many businesses can manage this, it can occasionally cause a major inconvenience, especially if the repayment date is on or around the dates that you transfer your PAYE or VAT payments to HMRC.
Ideally, you should have the ability to make a larger payment and even defer a payment if needed. Retail business banking loans simply do not offer this type of flexibility and the ability to adapt around the cash flow needs of a business.
Building credit for when you might need it in the future
When your business takes out a commercial loan, the fact that you'd taken one out will be recorded on your company's credit file. Every time you successfully make a repayment, that will also be recorded as will the ones that your company misses.
Taking out a commercial loan and repaying it on time and in full will have a significant and positive impact on your company's credit rating and on your credibility as a director who is able to take out finance and meet all of the obligations required.
The loan you take out now could lead to many more doors being open to you in the future.
Find a loan with Leads 2 Trade
We offer business loans between £3,000 and £500,000 from our panel of knowledgeable and approachable lenders. The lenders we work with are independent business specialists and they're set up specifically to work with companies that the banks can't or won't help.
We can offer you a decision in principle very quickly thanks to the technology we use to really understand your company. We have a 90% application approval rate meaning that no matter what your business history, you can still apply.
Our only requirements are that you have been trading for over 9 months and your turnover is a minimum of £2,500 a month.
To start your application, please complete the application form here.