How does a business loan work?

All businesses reach a time in the cycle of their development when they may require a business loan to move them to the next level. This loan could be used to expand their premises or find new ones, invest in technological hardware and software, introduce a new product line, or for many other purposes.

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Sourcing funding

The funding may come from traditional sources, such as the company’s existing bank or another institution, or one of the many online funders. You may also look at turning to private investors as an alternative.

A good place to start looking for a loan, or advice on its suitability, is the government website. It recognises that growing your company may need investment and offers some useful tips and advice.

Directors’ guarantees

Business loans will provide a lump sum form of financing; in exchange, the company will agree to repay the funding over an agreed period of time. This will involve interest payments and any fees associated with the preparation of the loan agreement. Usually, the interest will be fixed for the period of the agreement and you will be required to make monthly payments. There may, of course, be variations to the interest rate, and you should only consider a fixed interest rate if you can’t see the rates falling during the period of the loan. The lender will take this into consideration when it sets the terms and conditions, but you can always try to negotiate.

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Business loans can be secured or unsecured, with the former requiring you to produce collateral that the lender can access and repossess if you fail to keep up payments. This will often be business equipment, property, or investments.

If the loan is unsecured, the directors may have to enter into a director guarantee when seeking an agreement for a company loan credit arrangement. This is quite common when the company has limited assets. The loan may be a mortgage, and you may need to seek independent legal advice to fully understand what is involved. You will find plenty of firms offering this kind of advice, such as

These unsecured loans may suit smaller businesses, which tend to have fewer assets, that need a short-term loan. Remember that if the company fails to pay the loan, any directors who have signed a guarantee become personally responsible for the debt.