Decide if a loan is the best option

• Debt needs to add value to your business and it can be expensive. Have you considered other options, such as grants? Please see the Alternative sources of finance section for more details.

Determine the amount of funding you require and how quickly you need it

• It is important to be realistic about how much is needed. Remember to include fees in the calculation—it costs money to borrow money. Make sure to ask for enough money to accomplish your goal to avoid having to take out a further loan in the future. At the same time, be cautious of taking out a larger loan than you need, as the interest will be costly.
• The urgency of a loan can also greatly affect the lending rate—if you need funding very quickly, you may have to pay a higher rate of interest.

Type of loan

• Applying for a government-backed start-up loan for a business could be a very good option. These loans range from £500 to £25,000. Unlike a business loan, this is an unsecured personal loan (which means you do not need to offer up any business assets for the bank to repossess in the event you cannot repay the loan). Free support and guidance are available to help write a business plan, and successful applicants can receive up to 12 months of free mentoring. Please see this link for further details.
• Banks can offer the following types of finance (among others):
  • Working capital lines of credit for the ongoing cash needs of the business
    • Most small business owners typically use their lines for daily operations, such as inventory purchases (such as stock), and to cover periodic or cyclical business fluctuations. Collateral for the loan is often accounts receivable (i.e., what the business is owed by others) or inventory.
    • Overdrafts are also often used in conjunction with business bank accounts and are a flexible source of working capital for short-term needs.
  • Credit cards, a form of higher interest, unsecured revolving credit (which means that money can be borrowed as and when needed).
  • Short-term commercial loans for one to three years.
    • This may include bridging finance, which is a type of finance provided by the bank to businesses to maintain cash flow while awaiting funds from grant cheques, drawdown of commercial mortgages or loan agreements, or other confirmed sources of future income.
  • Longer term commercial loans generally secured by real estate or other major assets.
  • Equipment leasing for assets you don’t want to purchase outright.
  • Letters of credit for businesses engaged in international trade.

Loan Term

• The term of the loan refers to the length of time you have before the debt must be repaid. Debt can be either long-term or short-term.
• Long-term debt financing is commonly used to purchase, improve or expand fixed assets such as your facilities, major equipment and real estate (property).
• Short-term debt is often used to raise cash for inventory needs which arise periodically, accounts payable and working capital used for everyday business needs.

Secured vs. Unsecured

• Every borrower must promise to pay back the loan. With a secured loan, this promise is 'secured' by granting the lender an interest in specific property (collateral) of the debtor (you).
• If you default on the loan, the creditor can make back their money by seizing and liquidating (for example, selling) the specific property used for collateral on the debt. For small start-up businesses, lenders will usually require that both long- and short-term loans be secured with adequate collateral.
• A mortgage is a type of secured loan because the lender has the security of your house in case you’re unable to pay it back.

Shop around

• Five basic questions to ask a potential lender are:
  1. What is the term of this loan?
  2. What is the initial interest rate?
  3. Is that rate fixed or adjustable?
  4. How much would the monthly payments be?
  5. Why would you recommend this loan for my needs?