Small Business Loans

Small Business Loans

Raise Finance for your Small Business or Startup with Loans

Types of Small Business Loans

There are 3 forms of small business loans:

  • Short term loans – Provided for a period of 1 year, or less, these loans provide money to businesses which want to start immediately.
  • Intermediate loans – Provided for 1 to 3 years, these small business loans cover large initial expenses of a business.
  • Long term loans – Provided as capital for startup businesses, loan periods extend from 3 to 7 years.

Small business loans are available under the following broad categories:

Secured Loans: The loan amount depends on the value of assets held by the business owner applying for the loan. In case the borrower fails to repay the loan amount, his/her assets may be forfeited as repayment to the lender. Repayment periods for such loans are long. 

Unsecured Loans: Business owners need not produce any collateral, or security for unsecured small business loans. The rate of interest is higher than other loan schemes.

Bad Credit Loans: Although a good credit history is important to securing small business loans, business owners with poor credit history can also secure loans. Due to high risks involved however, lenders may charge high interest rates. 

Small Business Loans for Woman: Women are actively involved in business today. There are special loans for female entrepreneurs provided by many financial and non-financial institutions. 

Types of Small Business Loans Available in UK

Small Firms Loan Guarantee Service:  This comes handy especially if you are lacking in securities to produce for loan acquisition through normal loan channels. The Small Firms Loan Guarantee is provided by the Small Business Service (SBS) that operates under UK Government’s Department of Trade and Industry.

The SFLG service is jointly run by UK Department for Business, Enterprise and Regulatory Reform (BERR) and 27 participating lenders, including banks that offer loan amounts up to £250,000 to new businesses over a maximum 10-year period. The participating lenders scan loan eligibility. They are also responsible for making decisions regarding small business loans.

New businesses are generally considered risky ventures; when a company has little or no security to offer against a loan, banks are naturally apprehensive about lending finance. Businesses approaching the SFLG ensure a good amount of security with Government fund backing 75% of total loan required. This makes banks slightly bolder in loaning funds. Of course, loan applications are still thoroughly appraised, loan applicant’s backgrounds checked, and eligibility criteria applied, limiting who acquires the loan.

Eligibility for small business loans under SFLG

SFLG specifies the types of businesses that can apply for small business loans under its loan schemes.

  • UK business owners applying for SFLG should have paid corporation tax for businesses for less than 5 years. This usually means that the company is fairly new, with less than 5 years market experience.
  • A non-manufacturing company should exhibit between £1.5m and £3m annual turnover; £5m/less than £5.6m if it’s a manufacturing business.
  • There are restrictions imposed on some businesses. SFLG is provided to most businesses, excluding some industrial sectors like catering, retailing, beauty parlors and hairdressing, coal, motor servicing and repair, travel and steel agents, estate agencies, cultural activities, museums, and libraries.

SFLG main features

  • The Government guarantees 75% of the loan.
  • Businesses can avail loans for periods of 2 and 10 years. The loan amount varies between £5,000 and £100,000.
  • Companies trading more than 5 years can avail loan amount up to £250,000.
  • The loan borrowers are required to pay premium on the outstanding loan amount at 2% rate to the Department of Trade and Industry.

Community Development Finance Initiatives (CDFI): The major advantage of CDFIs is that they don’t look at the credit history of a business. Instead, it evaluates applications for small business loans individually, covering all sizes of business.  In UK, there are more than 60 CDFI organisations providing small business loans. Loan amounts vary depending on the region and CDFI schemes available. 

The Carbon Trust: The Carbon Trust provides small business loans between £3,000 and £400,000 at zero percent interest rate, payable over a 4-year period. The Carbon Trust small business loans are helpful especially if companies are planning to purchase energy-efficient machinery for their business. 

The Prince’s Trust: Designed for individuals between 18 to 30 years, the Prince’s Trust provides business funds to those unemployed or working less than 16 hours a week. The program provides small business loans up to £4,000 (£5,000 for partnerships) to support small business startup ideas. 

Points to Consider When Taking Small Business Loans

Business owners aiming for small business loans should be aware of the risks involved. While it is important to check business plans and financial targets, being careful in the early stages of business will reduce stress, save time and money. Before going for small business loans, make sure your business plan has potential to generate the revenue it promises. It may help to start small and test your business before applying for small business loans.

A few points you may want to consider:

  • Your ability to repay the loan amount.
  • The interest rate at which you repay. Try and get a realistic interest rate on your loan.
  • What is the length of the loan? Agree to a realistic time frame to repay the loan.
  • Do you have collateral against which you can secure a loan? Loaning institutions favour businesses which can provide alternate methods of repayment of loan.
  • Have you invested any money in your business? Lenders generally like it when you provide cash equity to your business. If you can show enough cash in your business, you are likely to bag the loan.
  • How good is your credit report?
  • You should prepare all the right documents before applying for a loan. Essential documents would be: proof of ownership, business contracts, letters of reference, financial statements, tax returns, credit references, Incorporation or LLC organisational documents, or any other documents the lender requires before loaning funds.
  • How good is your business plan? How are you going to redirect the loaned amount? Is your business model impressive? How good an impression does it cast on your lender?

Before applying for small business loans, it is worthwhile to check the availability of Government grants. With no repayment involved, if you strictly adhere to the rules and regulations applying to a grant, it can save you a lot of money. Business cash advances are also good options. Unlike loans, repayments depend on future credit card sales of a business product.