Business Loans

A guide to business loans: 3 things first-time business owners should consider

Business loans can go a long way in helping first-time business owners get their operations off the ground, but taking out credit is not without risks – it’s important to do as much research as possible before signing on the dotted line. Here are three important things to consider when taking out a business loan.

1. Secured versus unsecured loans

There are two main types of business loan to choose from – secured and unsecured. Secured loans are those where you borrow against a business asset, which gives the bank the security of recouping their funds by selling the asset if you default on the loan. A business asset could be either stocks in your business or physical property, such as your business premises or equipment.

Unsecured loans are those where you borrow without putting down any assets as security. This is riskier for the lender because they can’t easily recoup their costs if you default on the loan. Due to the increased risk, lenders charge higher interest rates on unsecured loans.

Neither option is necessarily better, but it’s important to understand their differences and choose what’s right for your business. Secured loans tend to be cheaper overall but borrowers run the risk of losing control of their assets. Unsecured loans are less risky for borrowers but cost more overall.

2. Overall loan costs

Interest rates range between 2% and 13% on business loans in the UK so it’s important to shop around for the optimum deal. The best way to compare loan costs is to compare representative APR. APR stands for annual percentage rate and it’s the total cost of the loan over a year, including interest paid and automatic fees. For example, a 5% APR on a loan of £5,000 means that the loan will cost £250 per year. When advertising loans, lenders list representative APR to show the typical cost of the loan. The APR advertised will differ from the actual APR for each individual loan granted, because interest rates and loan terms differ from one customer to the next.

Although representative APR won’t tell you exactly how much a loan will cost you, they’re useful for identifying the cheapest loans and lenders. Legally, lenders must offer the advertised APR to at least 51% of successful loan applicants, so you can consider representative APR a fairly dependable metric when comparing business loans.

3. Long-term business goals

20% of businesses fail in their first year of trading, and a lack of clear goals or strategy is a major cause of failure. Before committing to a loan it’s vital that you have a tangible, measurable goal in mind as to how the funds will grow your business. It’s one thing to know that a loan will pay for a new piece of equipment, but how long will it take until the equipment pays itself off? How long until it’s making a profit? How does the equipment play into your long-term business strategy?

By asking these questions, you can ensure that borrowed funds truly contribute to the long-term success of your business rather than temporarily plugging a financial hole and burdening your business with debt.

Take your time when choosing a business loan

There’s a lot to consider when shopping for a business loan, so don’t rush into it. Shop around, seek advice from fellow business owners, and be sure to read the terms and conditions of prospective lenders carefully before committing to a loan.