A business loan is specifically designed to aid in funding purposes related to a business. This may involve helping to buy premises, hiring new staff alongside purchasing stock and going towards running costs. Many businesses require startup business loans and other funds to get a business up and running, whilst other businesses may simply need some extra funding during periods of reduced revenue, to pay for running costs and similar.
After a company is founded, it usually won’t generate profits or revenue for a few years. As a result, the costs of keeping a business running in those early days can be extremely difficult. However, a business loan is a viable option which can ensure smaller businesses and startups can remain open in the UK.
Business loans in the UK are generally unsecured loans which can be utilised by businesses needing some extra capital. The purpose of a business loan is to help businesses out in those first vulnerable and difficult years. Although there are other business finance options, such as asset financing or bridging loans, many business owners opt for a standard small business loan.
These loans may be offered by a bank or high street lender, and generally lend from anywhere between £1,000 to £15 million. The repayment term is usually from 1 month to 25 years.
Although there are lots of different types of business loans, they generally fall under two categories:
- Secured: These loans are withdrawn by using a business asset as security. If you fail to make the full repayment of the loan, the lender can sell your asset to get their money back. As you have an asset, the interest rates are typically lower but, on the downside, if you fail to pay back the loan you risk losing your asset.
- Unsecured: These loans will lend to your business without needing to use an asset as collateral.
If you’re a business owner and in need of a business loan, you may have wondered if you can use such a loan for personal use.
However, a business loan is not a personal loan. It must solely be used to fund purposes relating to your business as opposed to a personal loan which can be used for personal purposes. Business loans and personal loans are designed for different borrowers and, as such, they have a number of different features.
For example, the application process is usually more complicated than for a personal loan but typically has lower interest rates. A business loan also generally consists of a larger amount as the lender will likely take into account the future potential profits of the business.
Business loans may also include support and offer more flexible lending options than personal loans. Furthermore, as interest and costs associated with a business loan are usually tax deductible as a business expense, this means that business loans should be used wherever possible as they can help to minimise your tax bill and thus maximise your personal income.
So, a business loan should not be used for personal use. Generally, business loans are used for purposes related to setting up and running a business as well at times where income is irregular for businesses, where these loans may be able to cover a shortfall. This may include:
- Moving and/or purchasing premises
- Purchasing stock
- Helping with business set-up costs including rent deposits or refurbishment costs
- Taking on new staff
- Buying new equipment
- Financing a seasonal business where there are long delays between buying stock, paying wages and making sales
- Paying off any debts
- Expanding operation
- Paying unexpected bills or expenses
- Covering long customer payment terms or late paying customers
- Financing capital purchases
- Paying for marketing or advertising costs
By covering this variety of business purposes, a business loan can help to nurture independent small businesses, but can also help to encourage entrepreneurship on a wider nationwide scale.