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Business bank loans – an overview for small businesses

October 8, 2011

The availability of bank loans for businesses is a hot topic at all stages of the economic cycle. During downturns, lending can become tightened, while boom times see some businesses take on huge debts in their quest for rapid growth.

Either way, if you are a new start-up or a small business with a very limited amount of your own funds available, business loans are a way to obtain some financing for expansion plans, or even just to cover some of the extra costs associated with setting up a company for the first time.

Commercial loans for businesses

Commercial loans for businesses are much like personal loans for individuals; you borrow an agreed sum of money, over an agreed period of time, at an agreed rate of interest.

You’ll need to eventually repay the full amount borrowed and the interest too, but it’s a way of obtaining finance for expansion projects that you are confident will reap a positive return on investment.

In turbulent times, the supply of business finance can become constrained. Over the past few years, the government has taken steps to try and keep the banks lending to businesses, even during the depths of recession, with varying levels of success.

Interest rates

As with mortgages, business loan interest rates come in several different ‘flavours’.

There are fixed rates, which give you absolute certainty over the amount of interest that will accrue over time, while variable rates will mean your repayments will rise and fall as the Bank of England base rate changes.

Whether you go for a fixed or a variable rate, depends on your attitude to risk and where you envisage interest rates to be during the period of your loan.

Look out for capped rates where available – these are a best-of-both-worlds solution that allow the interest rate to fall with the base rate, but will not go above an agreed threshold.

Where to go

Unless you’re only just setting up in business for the first time, it’s likely that you already have a business banking provider – and this is naturally a good first port of call if you have an adviser you trust.

However, you might want to look at other lenders to see if you can get a better deal elsewhere. If you would rather not spend the time doing this yourself, you can enlist the services of an independent adviser to work out the most affordable way of getting the funds you need.

By borrowing from a lender who subscribes to the BBA Lending Code, you have the peace of mind of knowing that your funding provider is authorised to offer business loans.

What to look for

While you should always make sure you fully understand the fine print before you sign a contract that could affect the future of your business, in the case of a bank loan it’s your financial survival that’s on the line so it’s vital you do so.

You should make sure you are aware of any fees that might be incurred on top of repaying the cost of the loan and the interest that has accrued.

For instance, there may be an upfront fee associated with taking out the loan, or other arrangement fees that are charged at the beginning or end of the repayments, or added to the amount you have borrowed.

There will probably be an early repayment fee if you want to settle the debt ahead of schedule, so don’t expect to fully escape the interest costs that way.

Further information

Before you apply for a bank loan – to save time and increase your chances of success – you should read our guides to; The secrets of how to get a business loan and How to maximise your chances of securing a small business loan

More help on funding your business

You can find lots more help and tips on all aspects of business funding on ByteStart. Here are a few of our most popular financing guides;

And these will help you with your cash flow;