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Small Business Loans - An Overview

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Whether you're starting a new business, or have been in business for some time, there may well be occasions when additional funding is required to fund the business.

Small Business Loans come in various forms, and are widely available. They can provide a very flexible solution to any type of funding requirement. This article provides a high level overview of the small business loan market.

Commercial Business Loans

Commercial loans are available to most small businesses and start-ups, subject to status. All the main high street bank, and a multitude of other lenders operate in the small business loan market. As with a personal loan, your business will borrow money and repay it over a pre-agreed number of months or years, at a fixed or variable interest rate.

Clearly, since the start of the credit crunch, many businesses have found it harder to source funding, and have found interest rates on loans and overdrafts have risen sharply in many cases. However, with increased pressure from the new Coalition government on banks to lend more, conditions should start to improve - especially as the main UK banks are now returning to profitability (August 2010).

Interest Rates

Business loans are typically available at a fixed or variable rate but capped rate loans are also available. With a fixed-rate loan, you know exactly how much you need to repay for the duration of the loan.

Variable rate loans are typically tied to the Bank of England base rate, so may well fluctuate over time. Obviously, if the BoE lowers interest rates, you will pay less, but if it raises rates, you may end up paying significantly more to borrow money than you may have hoped for.

Some providers now offer business loans with a 'capped' interest rate. This option allows you to benefit from any falls in interest rates but the rate won’t rise above the agreed level for the capped period.

Where to look for a loan

Most banks and building societies offer commercial loans. You should spend time researching the loans available rather than simply going with your current business banking provider. To avoid unauthorised lenders, make sure your potential lender subscribes to the BBA Lending Code (PDF).

Things to keep a look out for

Most of us are guilty of signing documents without reading the small print, but when it comes to taking out a small business loan, you should make sure that you are aware of any hidden charges, or potential penalties which may apply. These include an initial fee for taking out the loan, redemption penalties for early settlement of any loan, late payment charges, and other arrangement fees.

You may well secure a loan at a seemingly competitive rate, but "add on" fees may bump the real repayment cost up significantly. Ask any potential lender to disclose all such fees/penalties up front before signing anything.

Further Business Loan Resources

There are many other ways to find funding, such as through grants, and invoice financing. Here are some links to other useful guides:

Posted August 4, 2010
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