In a market where alternative finance options are becoming increasingly popular, it’s important to make sure you’re securing the right facilities for your business. Are you feeling a little light on cashflow? Maybe planning for expansion? Securing the right loan could be a pivotal step toward growth or stability.
What is a business loan?
A business loan is a funding facility that allows business owners to inject a lump sum of capital into their business. This enables you to expand, grow and stay competitive without needing to use cash reserves.
To be eligible for a business loan, your business must:
- Be a UK incorporated business
- Have been trading for at least 12 months
- Be able to demonstrate that you can repay the loan
- Produce financial accounts and business bank statements
How does a business loan work?
Business loans come in various forms, each catering to different financial needs and circumstances. The most common types are secured and unsecured.
Unsecured Business Loans:
These types of loans don’t require a formal charge on your property/security. Instead, lenders will look at the business’s financials, credit history and existing payment obligations to assess your eligibility. You would be expected to provide an unsupported personal guarantee, which means you would be personally liable for the repayments if the business defaults on the loan. For this reason, interest rates are usually higher for unsecured facilities.
Over the last decade, there’s been a surge in alternative finance providers specialising in the unsecured loan marketplace, leading to a wide range of interest rates and terms available from multiple lenders. SMEs need to be cautious when navigating funding options through these avenues, so ensuring you partner with the right lender who has the success of your business in mind is crucial. PMD Business Finance will support you with navigating this area of the market to make sure that you’re getting the right facility for your business.
Secured Business Loans:
These require business owners to provide an asset as collateral, such as commercial property or a buy-to-let portfolio in the UK. This arrangement poses less risk to the lender, potentially resulting in lower interest rates. However, failure to repay the loan can lead to the lender repossessing and selling the assets/property used as collateral. Whilst interest rates can be lower, the time taken for these deals to be accessed can be significantly longer as lenders must instruct valuers and solicitors to support the transaction. There may also be other fees to consider, such as valuation and professional fees. Due to this secured lending is more commonly used when funding needs are over £500k. This is also a solution when unsecured options aren’t available.
While traditional lenders often avoid niche assets like artwork or collectibles, some lenders might accept high-value personal assets, such as vintage and high value cars, as security. However, the marketability of the asset will play a large role in the lender’s valuation.
What can you use a business loan for?
Business loans cannot be used for personal requirements, but they can be used for a wide range of legitimate business purposes and needs.
- Expansion and growth
- VAT and corporation tax bills
- Debt consolidation
- Working capital injection
- Operational costs – purchasing stock, staff, marketing
Before taking out a loan, you may want to look at your business model and make sure that it’s profitable in all areas of the business. We often get a lot of requests for loans, however upon reviewing them, we often find that customers have cashflow needs that are resolvable with other products, for example, full site fitouts.
Repayment options
A business loan is typically repaid over time in regular monthly installments, with interest. Most facilities have payment terms that range from 3 months up to 5 years. Some lenders will consider terms of more than 5 years, however this is subject to the amount you’re looking to borrow and your business’s trading performance.
Are there government-backed business loans?
The UK government introduced several loan schemes during the pandemic. This includes the Coronavirus Business Interruption Loan Scheme (CBILS) and the Bounce Back Loan Scheme (BBLS). These initiatives were replaced by the Growth Guarantee Scheme (GGS), which provides 70% government-backed finance for loan amounts up to £2 million until March 2026. Unlike previous schemes, lenders can take personal guarantees alongside government-guarantees.
Is a business loan right for me?
Whilst business loans can be quick and easy to access, it’s not a one-size-fits all funding solution. There may be more suitable products for your business requirements. For example, if you’re in need of cashflow to purchase equipment, plant or machinery. In this instance, an asset finance facility may be a better option. If you’re wanting to cover a shortfall in cash due to payment terms from suppliers and how long it takes your customers to pay for your services, an invoice finance facility may be better suited. If the loan you’re looking for is required to pay for a VAT or corporation tax bill, there are specific products that are specifically designed to meet those needs.
In short…
Whilst there may be better products to manage working capital depending on your business’s requirements, secured and unsecured business loans offer quick access to working capital as well as the flexibility to use the funds for any legitimate business purpose. As a business owner, you can either utilise a loan to manage your cashflow more effectively or use the funds to support expansion and growth plans.
Unsure if a business loan is the right solution for your business? At PMD, we offer a full-service finance solution with access to over 150 funders. Facilities include:
- Asset finance
- Invoice finance
- Asset refinance
- Merchant cash advance
- Commercial mortgages and bridging loans
- Acquisition finance
If want to know more about any of the above, feel free to speak to a member of our team. We’ll take the time to understand your business’s finances, as well as your future growth plans, and identify the right funding solution, or mix of facilities, suited to your unique business requirements.
Written by Chris Lever, Head of Cashflow