Commercial Loans: The Ultimate Guide For Your Business in February 2024
A commercial loan is simply a loan that businesses seek when experiencing financial instability. In essence, a lender will draw an agreement stating that the business will be in debt to them, which must be repaid within a specific period with an interest rate attached. The use of this monetary aid is restricted. It can only be used for business-related transactions such as renting an office space, paying commercial energy bills, staff wages or purchasing raw materials for sale. There are many different types of commercial loans depending on the loan requirements, and the most popular are listed below.
Commercial Loans: Unsecured Loans
Unsecured loans work precisely as their name suggests. They do not require the business to provide security alongside their loan, meaning that there is a higher risk to banks because there is no collateral to be sold in the event of liquidation to repay the debt the lender is owed. The average interest rate for this type of loan ranges vastly between 10-and 30%, which is higher than secured loans because of the risk it poses to the lender.
However, it is beneficial for businesses that are newly starting up because they often do not have collateral to aid them in securing funding. This way, not offering security does not limit a business from receiving financial aid, and there is a chance for new businesses to succeed. The maximum that lenders offer for unsecured loans is around £25,000, ideal for small businesses.
Some benefits of business loans include:
- Working capital support
- Easy to apply for
- No profit sharing
- No collateral required
- Reasonable interest rates
- Tax benefits
- Working capital support
- Multiple loan options
Commercial Loans: Secured Loans
Secured loans are the opposite of unsecured loans, meaning that businesses require collateral to be accepted by the lender. Collateral can be any high-value asset such as property, inventory, stocks, and equipment, although the bank must value this first to ensure that it will be sufficient.
The number of security lenders usually requires many factors such as:
- Credit history,
- The loan to value ratio, and
- The individual company.
An advantage of obtaining a secured loan is that the interest will usually be lower, as collateral demonstrates the company’s reliability, and the amount you can borrow is also more. Therefore, larger businesses can benefit from secured loans as they have more assets and require bigger loans. However, businesses must consider that their collateral may be seized if they default, so many companies opt for different types of loans instead.
Commercial Loans: Peer-To-Peer Lending
Peer-to-peer (P2P) lending is an alternative method of securing funding if you are rejected by many banks or prefer to use a different way of borrowing. The P2P lending process is similar to a conventional loan. You create an application including your financial history, the reason for needing a loan and what you will spend the loan on. However, instead of submitting this application to the bank, it is entered online on the P2P platform.
A business profile is created, and investors can view your company details and credit score. There is no guarantee that you will be accepted for a loan if you have a low credit score or poor financial history, but if one lender rejects your application, there are numerous other options on the platform. Once you have found a lender, they can discuss the interest rates they charge, which vary between investors. It should be noted that there is also an administration fee for every payment made on the network. This is an effective solution for businesses that banks have rejected due to poor credit.
Commercial Loans: Start-Up Businesses
Start-Up Loans are subsidised by the UK government and designed with the incentive to fund new businesses that may find it challenging to be approved for a commercial loan. The criteria include being over 18 years of age, operating a legal business in the UK, and trading for less than three years. If your business qualifies, a loan can be taken out from £500 to £25,000, which must be used for commercial purposes.
As a result, new companies can receive the funding they need to rent an office space where they can carry out operations, buy raw materials for the products they sell, hire new employees, train staff, or maintain the property. These loans can be repaid within five years and do not require collateral. Furthermore, the interest rate is 6%, which is beneficial as it is lower than other commercial loans.
Commercial loans: To Conclude
In conclusion, businesses apply for commercial loans to start up their business or maintain operations in their existing company. Loans can vary in interest rate, fixed or variable tariffs, repayment period and collateral. Therefore knowing the different types can increase the chances of being approved.
Funding options discuss obtaining business loans with bad credit in more detail here.
|Business Loans in the UK
Direct funder – not a broker
|£8,000 – £500,000
Fast, hassle-free business finance from £10,000 to £500,000 at competitive, fixed rates
They will run pre-eligibility checks, without affecting your credit score
|4.9/5 Trustpilot rating
|Must be a limited company with 6+ months of trading
|Must have a min of 1 year trading
|Europes largest revenue finance provider
|Must take on a min of £3,000 per month of card transactions
|£3,000 sales per month
|No penalties for early or late repayments
|Only available to Limited companies in England/wales
|Lender & Broker
|Must be a limited company with 2+ years of trading
Other useful links about loans:
Understanding Small Business Loans
What is a Personal Guarantee?
Manufacturing Business Loans
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