A commercial loan is a common form of funding for any business, enabling you to raise finance for differing needs in exchange for a manageable repayment schedule.
When seeking a loan, finding a competitive deal that suits your business needs and affordability criteria is crucial. Many loan products are on the market, so it’s worth shopping around to find the best fit.
Below, we have listed six key loan features to compare in your bid to find the right solution.
- Total amount available
When seeking a loan, you will have a specific goal you’re looking to fulfil. You may need to raise a set figure to succeed in your ambitions – and you need to find a loan that will give you that much.
Individual lenders will offer different sums based on your financial records and how risky they perceive you. If your first choice isn’t willing to provide what you need, it’s worth considering another lender who might give you more.
Alternatively, you might need to take out other funding alongside your loan to meet your funding need.
- Interest rate
All loans will be subject to interest charges. However, the interest rate will vary between lenders. The lower the interest rate, the less you will pay, which is helpful when comparing loans.
The factors that affect interest, include a perceived higher risk associated with providing you money, which would result in higher interest rates.
Generally, most commercial loans will be at a fixed interest rate, which ensures the repayment amounts will stay the same over the course of the loan period. Other forms of loans may offer a variable rate which will fluctuate with the Bank of England’s or the lender’s own base rate, meaning your payments will change from month to month.
- Loan term
In most scenarios, you will be provided with a loan over an agreed time period. The loan period will vary between lenders, so you must review whether you are happy with the term, as it will affect the amount of the loan repayment.
The shorter the term, the higher the repayments will be repaid as the capital (loan amount) is repaid over a shorter period plus the interest on the money borrowed. Conversely, the longer the term, the lower the repayments will be – but you will also be paying interest for longer, increasing the total amount paid.
In any scenario, you must be confident that you will be able to keep up the repayment schedule to avoid falling into debt.
- Secured vs unsecured
Loans fall into one of two categories: secured or unsecured. A secured loan uses your business assets – such as plant, equipment, motor vehicles or premises – as collateral. If you default on repayments, the lender may seize control of these assets to clear the balance owed.
Secured loans are seen as less risky by the lender. As a result, it is possible to secure larger sums of funding at lower interest rates. It will also increase your chances of being approved.
If you aren’t willing to pledge your assets or don’t have sufficient assets, your best option is an unsecured loan. As these are considered a higher risk, it is likely that you will receive a lower amount and pay more interest to offset the perceived risk to the lender.
Most unsecured loans require you to sign a personal guarantee, in which you and your fellow directors/partners guarantee to cover the debt personally if the business can’t maintain repayments. A risk factor is associated with this, so it’s worth taking out personal guarantee insurance if you decide to go ahead.
There are lenders that will offer unsecured lending without a personal guarantee but the level of loan size is very low as a result.
- Decision process
Another significant factor is how quickly funds are released. Some lenders will have a lengthy application process, starting with you having to fill in the necessary paperwork, awaiting a decision from the lender and eventually having the money paid into your bank account.
If you need the money quickly, then the alternative lending market may be more suitable. This will allow you to refine your search for lenders who provide the funding when needed.
Remember to review the interest rates and ratings of the lender to ensure they are the right fit for you, as there are some unethical lenders in the marketplace.
In many cases, you can expect regular repayments of your loan – usually monthly, but in some instances weekly or daily. This will depend on the lender’s criteria. Whatever the schedule is, lenders will stick to it rigidly, meaning you need to make sure you can meet every instalment.
Some lenders may offer greater flexibility, such as allowing early repayment if you have the funds to do so.
It’s worth reviewing how flexible the lenders can be, especially if you envisage paying off the loan early, for example.
- Additional support
In some cases, a loan may come with additional support that proves invaluable to the success of your business. Examples include mentoring, coaching, training or networking opportunities. This is particularly common if the loan is part of a broader scheme, such as a start-up programme.
If this is something you would like, it’s worth searching around as you may be applicable for such a scheme.
If you’re seeking a loan for your business, one of our advisors will help review your options and find the best fit. Get in touch today for advice.