If you’ve ever considered taking out a business loan, you’ll know that the decision can seem like a bit of a minefield. Don’t worry! We’re here to explain exactly what business loans are and what they could be used for – and what you definitely shouldn’t use them for.
What is a Business Loan?
A business loan is, quite simply, a loan that’s specifically for business purposes. Usually your business will apply to borrow the money from a bank or other lender for a fixed period of time, creating a debt that will be repaid to the lender with added interest – and rates can vary. You’ll make monthly payments (or payments on another agreed schedule) and you must repay the loan according to the terms and conditions you agreed to when you took it out.
The important thing here is that you must use the loan only for business purposes, but you’ll also need to carefully consider how you will afford the repayments when thinking about the term of the loan. Some lenders will provide short-term finance for a set period – for example, borrowing £10,000 for up to a year. Others will provide larger loans over a longer term. You can choose from secured business loans, where the amount you borrow is secured against an asset such as a property, or unsecured loans. Bear in mind that with a secured loan, the lender can seize the asset if you fail to make payments as agreed.
What Can You Finance With Business Loans?
So, what can you use business loans for? Increasingly many entrepreneurs are using start-up business loans to fund starting a small business, covering their start-up costs. You could use a short-term loan to assist with cashflow problems, but this should only be done if you expect your situation to improve in the longer term.
You could use a business loan to purchase assets like property, machinery or stock; which may be helpful if you’re planning on expanding or targeting new markets. Or it could be used to set up a website or online presence for your business. You could even use a business loan for marketing and recruitment, so you can attract and hire new members of staff to grow your business.
What Shouldn’t You Use Business Loans For?
It may sound obvious, but you definitely shouldn’t use a business loan to cover personal expenses, even if these are essential to allow you to run your business. Anything from your broadband bill to your car’s MOT is a personal expense that a business loan simply shouldn’t be used for.
Starting Your Business – Good or Bad Idea?
It might seem like a good idea to use a business loan to start a small business, but it’s not always the best option. Not only will it be difficult for you to get the finance you need – many lenders ask to see two years of accounts or evidence of your profits in order to take out a loan. You may also find yourself unable to afford repayments, as you have no idea how much turnover your business will make.
Paying Off Other Debts
Don’t ever use business loans to pay off other debts. If you already owe money on priority bills and to suppliers, your business is struggling, so why add another debt on top of the mounting pile? Most lenders won’t consider you for a loan if you’re already in debt, and it’s important to think long term here. You’ll be adding to your problems if you commit to ongoing monthly payments for a business loan for the next few months or years. If you know you’ll have money coming in soon, invoice factoring is a much better option to solve short-term cashflow problems.
It may seem like business loans are the answer if you’re a start-up or a small business looking to expand, but they’re not always the best option. Invoice factoring can be a more sensible, low-risk choice, as you’ll never borrow more than you can afford to. To find out more, why not get in touch with Simply Commercial Finance on 03333 059 513 today.
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