Business Loans

All businesses need to obtain finance from time to time. A business loan will normally be required when you start your company up, to pay for the necessary infrastructure and commence trading before your profits start to roll in. Obviously, the size of the business loan that you will need will depend on the nature of your new business: setting up a florists shop will probably be substantially cheaper than establishing a niche private air charter company, for instance!

It could be possible that an agreed overdraft may be all you need to get up and running, but it’s more likely that you will need a business loan from your bank. Again, in difficult financial times such as these, it pays to shop around. You should talk to as many financial institutions as possible to get the best deal for your business loan – but you may find that one lender has an edge over another in the type of support that they may offer to start-up companies alongside the business loan.

Depending upon the magnitude of your ambition, it may also be worth talking to some venture capital firms who may underwrite your business for a stake in it as an alternative to a business loan. In any event, whether you obtain a business loan or other form of funding (and for your own sake) you will need to provide a well thought out business plan to convince people to back you, or offer that all important loan.

A business loan will typically require some form of security (in the event that the business fails, the lender will want some surety of getting their money back); often this will mean using your home as collateral. As with any loan, a key factor to look at will be the APR (annual percentage rate or interest). Loans usually come with a fixed rate of interest or a variable rate of interest and both have different implications for you as the borrower. Both have advantages and disadvantages: a fixed APR means that you agree on a set amount that will be added to your monthly repayment to the bank, regardless of how the Bank of England base rate changes.

This has the advantage of predictability as you can determine the cost with certainty and they will not vary over the lifetime of your loan. If you could obtain this type of financing, now is the best time since UK bank lending rates are at historically low levels (and will probably only go up). On the other hand a variable rate of interest is less attractive at a time of low rates because (as the name suggests) it can fluctuate. This means that you loose the predictability over the cost of your business loan. In the current global financial climate, your variable APR will start out quite low, but as the world economy claws its way out of recession, the rate will rise, increasing your business costs.

A variable rate loan may be the only option open to you. It is often sold at a slight discount to a fixed rate loan to make it more attractive. In times when interest rates are relatively high (a couple of years ago compared to today’s rates), you might want to gamble on a falling rate – making your business loan cheaper – but you’ll need nerves of steel or a good crystal ball!

As you will have noticed from the news, at the moment the banking industry is in crisis.

It is likely that as a consequence of the current world financial crisis that business loans may become harder to come by or the conditions may be less attractive than before. It is surely ironic that, in the face of a global financial crisis that largely stems from a loss of confidence about and within the financial sector, financial institutions have become much more cautious about lending money to members of the general public, including small businesses.

Lending money is at the very heart of banking sector activities and it is only through the granting of new loans that the global recession that the world is experiencing will be brought to an end. Your small business could help this by increasing the UK’s GDP (Gross Domestic Product, or turnover) by trading with other companies for the things you need and through people buying your goods and services. But of course to be able to do this, you need the banks to give you that all important business loan, so we find ourselves in a “Catch-22” situation.

The recession was largely triggered by the so-called sub-prime lending crisis in which major financial institutions lent money to individuals that were ultimately unable to repay their debt. At the moment, the financial sector seems to be in a “once bitten, twice shy” mindset. Confidence will return to the sector, but the system has had a nasty shock and it will take some time before the money supply recovers.