There are many ways businesses can raise funding but getting a business loan is definitely one of the quickest. If you’re looking for a business loan and your stuck comparing lenders and yo-yo-ing between FAQ pages, there are three essentials things you should know so you can find and secure the best possible loan for your business.
You can think of interest as the cost of borrowing. Another way to think of interest is as the amount a lender earns on the money you borrow. Interest rates matter because they determine the cost of a loan and whether it’s value for money (interest rate should always be lower than a shorter credit facility like a business credit card, always watch out for high interest rates).
Even a small change in an interest rate can make a big difference to the total cost of a business loan. Thus it’s always best to seek the lowest interest rate.
So what’s a reasonable interest rate? Business loans are a competitive marketplace, so lenders are always offering good deals. An interest rate of less than 4 per cent is currently considered very good if you borrow over 1-5 years. Aim for an interest rate of 3.6 per cent. The lower the interest is, the lower your monthly repayments will be.
Secured or unsecured
There are two types of business loan: secured and unsecured. Some lenders specialise in one or the other and others do both. Secured business loans typically have a higher borrowing limit. They are secured against an asset, such as property, vehicles or plant machinery (these loans are effectively asset-based lending, a type of asset finance).
Unsecured loans are typically for smaller amounts. The security in place for the lender is an agreement you’ll make regular repayments.
Secured loans are usually easier to attain because there’s less risk to the lender. This makes them a better choice for people with poor credit but who are asset rich. Which is best for you depends on the amount you wish to borrow and the term you wish to borrow it over. However, the majority of business loans in the UK are unsecured because they are for smaller amounts (generally £25,000 and below).
Early repayment charges
As your business prospers, you’ll likely want to start paying off your loan early. Whether that’s in instalments (such as a few hundred pounds a month) or in one go with a lump sum, you need to be aware of any early repayment charges.
An early repayment charge is usually equivalent to one or two month’s interest, although higher amounts can yield a charge of three to six months’ interest. If you pay off your loan in full early, you may be charged an ‘early settlement fee’. Usually, you can get a quote from your lender for early settlement. If your lucky some lenders won’t even charge an early settlement fee.
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One final option for early repayment is to pay off your loan early by chipping away a little more every month. That’s usually fine with most lenders. You’ll reduce your term without experiencing a repayment charge, although some lenders cap the amount you can pay back without a fee.