13 Frequently asked questions about business loans

If you are looking for a business loan, the process and the information required can appear daunting at the outset. Consequently, it is essential to look at different areas of funding for business, how these may impact you and what you need to do. When looking at how to get a business loan, remember, each application will be looked at in isolation as there will be different factors to take into account.

You will probably have many questions about how to get a business loan. Some of them may seem relatively trivial, but you must have a clear picture of what you are signing up for before applying. Some of the more common questions include:-

How much deposit do I need for a business loan?

Many business loans will not require a deposit, although it will depend on how the funds are to be used and the current financial status of the business.

In most situations, you are unlikely to be asked for a deposit when applying for a business loan. However, if you can put either personal or business money towards an investment, this will save you loan interest in the long term. The majority of those who lend to small businesses are flexible as no two applications are ever the same.

Are small business loans hard to get?

This is a very competitive market, and you will find lenders servicing the top end of the market while others provide financial assistance to businesses with short-term challenges. In theory, you should be able to find lenders willing to consider the majority of business loan applications.

Those lending to businesses typically require collateral or a personal guarantee from a director/owner. As interest rates and maximum borrowing figures are based upon the risk/reward ratio, the higher the chance of repayment in full, the lower the interest rate. Very often, those looking for funding for business will be looking to acquire assets that will immediately improve cash flow and profitability. In many cases, the loan can become self-funding due to improvements to the business.

Which loan is best for business?

There are many different business-related loans, such as construction loans, bridging finance, equipment loans, asset finance, and traditional small business loans. It is simply a case of finding the most appropriate type of loan for your situation.

While there are different considerations for personal and business loans, sometimes a director will be asked to give a personal guarantee against a business loan. As we touched on above, there is an array of different loans for different business scenarios. Some will depend more on cash flow, others security or even third party guarantees. Therefore, you must find a loan that best suits your requirements.

How much money can I borrow for a business?

In theory, assuming the collateral and cash flow are available, you may be able to lend into the tens of thousands of dollars or even hundreds of thousands of dollars.

To say this is a “numbers game” would appear to trivialise the situation, but this is not the case. For example, a business applying for a $10,000 loan with limited collateral and cash flow may be turned down. While a company looking to lend $100,000, with significant security/collateral and strong cash flow, may receive a relatively quick positive response. It is important to be sensible, but if the planned investment would have a significant positive impact on the business, nothing is off the table.

Do I need to put up collateral for a business loan?

The vast majority of small business loans will require collateral or a personal guarantee from the owner/director.

Providing collateral for a business loan is beneficial on two fronts. Firstly, the lender is likely to look at the application more favourably as there is an exit route even in a worst-case scenario. Secondly, as the terms of any loan application will be considered on a risk/reward basis, the more security, the lower the interest rate. Consequently, even if you are successful with a business loan application, the addition of collateral could lead to even more favourable terms. You should investigate every option!

How quickly do I receive the funds once the loan is approved?

Usually, assuming all of the paperwork is in place, the funds should be available immediately as soon as a loan has been approved.

It is essential to communicate with your lender from the outset to ensure that all of the relevant information and documentation are provided. For example, if you are looking to acquire business machinery, any delay could put the potential purchase at risk. Lenders will require proof of identity for the company directors/business owners, and they may request sight of recent profit and loss accounts.

Can I repay my business loan early?

Whether you wish to increase your monthly repayments or make a full and final early repayment, this is an option with any funding for business.

However, when seeking funding for business, it is vital to be aware of the fine print, as some lenders may charge an early repayment fee. This tends to be a set administration charge, although it can vary from lender to lender. Some won’t make any charge at all!

Can I increase my business loan halfway through the term?

If you are up-to-date with repayments and there is a legitimate reason to increase your business loan, there is every chance your lender will agree.

If you successfully increase your business loan halfway through the term, it will likely be in the form of refinancing. Part of the new loan would be used to repay the outstanding initial loan, resulting in one loan and one monthly repayment. There may be some administration charges when seeking to change the terms of your initial loan, which you should discuss with your lender.

Will my credit rating be taken into account?

As a responsible lender, Alternate Finance will consider the business credit rating and those of any third parties involved in the loan application.

In practice, we appreciate that short-term difficulties can sometimes mask the long-term potential of a business. The introduction of collateral can often balance the negative impact of a challenging credit rating. A challenging credit rating does not necessarily mean that your business loan will be refused. This is yet another reason you need to be upfront and frank with your lender in the early discussions.

What interest rate will the business pay on a loan?

The interest rate you pay on a business loan will reflect the strength of the business, collateral and ultimately, the risk to the lender.

As we touched on above, any loan comes down to the risk/reward ratio, with companies such as Alternate Finance acutely aware of our role as responsible lenders. Our interest rates range from 13.95% to 26.98%, depending upon the financial status of the individuals and the business. If the loan is not feasible, we will be honest and upfront. It is not in either party’s interest to agree to a loan that is unlikely to be repaid.

Do I need to give a personal guarantee for a business loan?

Commonly, a director or business owner will be asked to give a personal guarantee for a business loan.

A personal guarantee is a type of collateral. If the business struggles to make repayments, the debt/obligation would be transferred to the individual. Consequently, the credit rating and financial status of those providing personal guarantees will also be reviewed with the application. When offering a personal guarantee for a business loan, be aware that you could ultimately be held responsible. Therefore, you must go into these arrangements with your eyes wide open!

What happens if I miss a payment?

One missed payment is not necessarily the end of the world, assuming that you can catch up relatively quickly. However, more than one missed payment will likely prompt a review of the situation with several options on the table.

Whether personal loans or business loans, the liquidation of a security is the last resort. If you are experiencing financial difficulties with your business, let your lender know as soon as possible. There may be the option to refinance your loan on a longer timescale, reducing monthly repayments and easing the financial stress, or even the opportunity to take a holiday payment. Unfortunately, if your short-term challenges become medium to long-term financial problems, the security/collateral would likely be called.

Can I extend the duration of my loan?

In certain circumstances, there may be an opportunity to extend the duration of your loan before the original repayment date. It will depend upon the business’s financial viability in the short, medium, and longer term.

Here at Alternate Finance, we fully appreciate that some businesses will experience short-term cash flow difficulties, which don’t necessarily impact the medium to long-term potential. Consequently, where it is viable, it may be possible to extend the loan duration, which would likely be a form of refinancing. But, again, the goal is simple, to reduce short-term financial pressure with reduced monthly repayments and to preserve the medium to long-term potential.

How to get a business loan

It is essential to be aware of issues that may impact your application when looking for funding for business. In many cases, specialist business lenders will be able to accommodate those companies suffering short-term challenges where there is still long-term potential. In addition, the use of security/collateral, personal guarantees and third-party guarantors can often prove invaluable. The lower the perceived risk to the lender, the more chance of a positive outcome with your business loan application.