Home Business Small Business Loans – How Do They Work?
Photo of man in office applying for small business loan on computer

Small Business Loans – How Do They Work?

Just like with a personal loan, taking out a business loan involves approaching your bank and borrowing money. The difference is that a business loan is used for a specific business purpose. You will need to convince your bank that your use for the funds is sound before they commit to lending.

Most people don’t have the spare cash needed to start a business, so they require financial assistance. However, securing a loan can be confusing if it is the first time you’re going through it.

This short article aims to explain how a small business loan operates and what you need to do if you consider applying for one.

What are the uses for small business loans?

The primary use for a small business loan is to cover the costs of starting or expanding your business. When you start your business, you are faced with the complication of cash flow and need to spend money to make money. A small business loan can provide you with the cash injection you need to get your business going. Other uses for your small business loan might include: 

  • Relocating your business.
  • Purchasing stock.
  • Repaying debts.
  • Funding expansion.
  • Purchasing equipment.

The amount of money you can apply for depends upon your business and the use of the loan. A small business loan can be for as little as a few hundred pounds, up to several hundred thousand. No matter how much you are borrowing, the critical considerations are what you need the loan for, and how you will repay it?

How does a small business loan differ from investments?

If you choose investment to fund your business, you will need to give some shares in your business to the investor in return for their lending. So, they will own part of your business, and they’ll get their return on investment as your business grows. Small business bank loans involve paying the money back over a set period, and with an agreed rate of interest. If your business is successful, you may be able to pay the loan off quickly. However, if your business is making a loss, you will still be liable to repay it. 

photo of man looking through paperwork and working on laptop

Another key difference between investment and small business loans is the relationship you have with the investor or the bank. The only interest that the bank has in your business is the amount of money they have lent you. On the other hand, an investor might want to get more involved by offering advice and guidance.

How to apply for a business loan?

Business loans are open for most businesses to apply for, but there are set criteria that you will need to meet before being accepted. These criteria might include a certain level of turnover, being VAT registered or having operated for a minimum period.

Different banks or providers will have different criteria. If you are a recent start-up or not yet established, you might have more favourable acceptance criteria to meet.

Make sure that you compare the criteria of different providers and select the one that best suits your business needs. Comparison websites like MoneySuperMarket make the decision process easier for you.

Make sure you have a full grip on your business financials when you apply for your loan. You will likely have to go through an interview with one of the bank’s business managers. 

Hopefully, reading this article will help you prepare and increase your chances of being accepted.

Related Posts