In the second instalment of our advice series, we shine the spotlight on business loans; a finance solution that more than half of UK businesses explore at one point or another. While most commonly required by startups and businesses looking to manage debt, the right loan can help any type of business enhance that bottom line.
A business loan is a straightforward solution to business finance .... right? Wrong.
While on face value a loan can seem simple, lenders, loan terms, tax impactions and numerous other factors need to be considered at length. This is why a business loan requires strategic planning and should not be a decision that is rushed into.
Below, we highlight business loan features that borrowers need to consider before signing on the dotted line.
The ‘term’ of your loan refers to the period in which you have to repay the loan to the lender. In most cases the longer the term, the more interest paid. The loan term is an incredibly important aspect of the finance product. For instance, if you are looking to keep monthly outlay as minimal as possible, a longer period should be considered. However, if you require a loan to bridge a short-term gap in your finances, a shorter term will suffice. Many use short term loans of 1-2 years for specific reasons, for example, a VAT loan.
Many lenders will offer interest-only periods on their loan products. This is usually for around 20% of the total term. Therefore, a 5-year loan would theoretically have a 1-year interest-only payment schedule.
Like any finance solution, it is essential that you read the small print of a loan agreement before agreeing and signing off on the proposed product. This is especially important when it comes to the terms and conditions surrounding fees. While you may think the only ‘fee’ is the loan itself, you would be mistaken.
- Arrangement fees - these are charged as the loan is arranged and vary hugely from one lender to the next.
- Monitoring fees - some funders charge quarterly monitoring fees to review you as a borrower. As part of the process, the lender will review the business against the business plan initially submitted to obtain the loan. This is a sort of performance review.
- Early settlement fees – The majority of loan providers will charge early settlement fees, meaning it will cost you more to repay the loan before the loan term has ended. These fees are important to be aware of if you plan to take out a loan and wish to refinance for a “cheaper” deal later on. Please note that some funders do offer a discount on these fees but most of the interest for the entire loan may be due. In other cases, funders may wave this fee but charge a larger arrangement fee.
Business loans for startups
Business loans can be used for start-up, scale-up and growth ventures; providing such businesses with a springboard in which they can use to generate income. From providing funds for materials, office space, staff and stock to much-needed monies for marketing purposes, there are many reasons startups are in dire need of cash.
Most lenders will require startups to provide a business plan along with their loan application, including a financial forecast and finance model. Here at Lime Advisory, we are experts in the preparation of these documents and work with business startups of all industries and sectors. However, over the years, we have made a name for ourselves for our work in the tech space, having supported many disruptive tech startups in raising funds and obtaining business finance.
We would be amiss to not mention the CBILS (Coronavirus Business Interruption Loan Scheme) when discussing business loans as a product, as many funders are providing these government-backed solutions at present.
A CBILS loan is 80% backed by the Government. Up to £250,000 does not require further security (this may differ depending on the funder). The overriding criteria with CBILS loans is that a funder will ask themselves if they wolf have funded a proposed case pre-COVID. Therefore, if a funder did not fund acquisitions prior to Covid they will not use CBILS to do this post-COVID. Or, if they were not investing in a certain sector, they will continue to not service this sector post-COVID.
Our advice for businesses is to seek out funders that would have funded theirproject pre-COVID as they are likely to fund using CBILS.
Looking for a business loan?
Whether you are looking for a business loan to start a new venture, a franchise opportunity, to clear debt or for investment purposes, the Lime Advisory team can help. With an extensive list of lenders on our panel, we can advise you on the best loan products on the market, supporting you throughout the application process and through the creation of forecasts and supporting documents.