How business borrow money/business loans

How businesses borrow money

Whether you’re looking for additional funding to grow your business, purchase new equipment and further inventory, or need a quick cash injection to support ongoing operations, a small business loan could be your best option.

Providing you with a fast and affordable solution and with various lenders offering a range of products, startups, and established businesses now have access to flexible financing options to suit all business needs.

In this post, Direct Route explores what a small business loan is, its benefits, and why keeping up with your repayments is vital to your business credit rating.

Small Business Loans UK

A small business loan is a type of business finance that can provide companies with a fast and affordable finance solution.

Business loans can be vast and diverse; however, if managed well and under the terms, these types of loans are a low-cost and convenient way to finance business activities.

From £1,000 up to £500,000, small business loans are often used to boost cash flow and provide a much-needed cash injection into the business, to purchase new equipment, recruit new members of staff, purchase more stock, pay unexpected bills and invoices, and much more – this is finance tailored to suit your needs.

Note: small business loans cannot be used to pay off existing debts in the business.

The loan is paid back to the creditor with additional interest and fees, usually monthly repayments, and set over a pre-agreed period.

Rates and fees are specific to the lender, and you should compare the most suitable products available and the ones that will most appropriately meet your needs.

To be eligible for a small business loan in the UK, you must operate in the UK, have been trading for a minimum of 3 to 6 months (trading criteria may vary from lender to lender), and the business owners must be over 18.

The good news is whether you’re looking for a small business loan startup or your business is currently facing a poor credit rating, there are lending streams available to suit everyone.

Types of small business loans

Bank Finance

Loans from large lenders like banks can be secured or unsecured, and both come with pros and cons.

Unsecured loans are typically sought when you require a smaller amount of capital so you will have shorter repayment terms. However, repayment costs will be higher, and you may be asked to provide a personal guarantee, so if the business defaults on repayments, you will become personally liable to repay the outstanding debt.

Secured loans are larger loan amounts and an asset to the value of the loan will be secured against the amount as security. Secured loans do come with better repayment rates; however, if you don’t keep up with your repayments, you run the risk of a debt recovery agency collecting the asset.

Cash Advance

When you opt for a cash advance, there is no interest charge but instead an upfront fee. From here, repayments are automatically taken on a regular basis.

This type of funding is most suitable for those with a poor credit rating, making it an affordable way to borrow money.

Revolving Credit

A flexible form of funding similar to an overdraft, with revolving credit, business owners can access pre-approved funds as and when required from approved creditors.

Interest is charged on the withdrawn and outstanding amount, so there is no long-term commitment.

This form of lending does come with higher fees but short terms, typically six months to 2 years.

Invoice Financing

Invoice financing can provide your business with immediate cash flow by selling outstanding and overdue invoices to an experienced and approved finance company.

This is a good option for those businesses who struggle with late payers. (Alternatively, a debt recovery agency is also poised and ready to support in this area too).

At Direct Route, we understand there is no one-size-fits-all funding, and every business is unique. You have to find the most practical way of borrowing that suits your business.

Think about how much you need to borrow, how long you need the money for, the time period for paying the money back, how long your business has been operating, do you have any business assets, what is your current credit score, do you have any other outstanding debts to consider?

What are the terms and conditions, eligibility criteria, is there a requirement for a personal guarantee, etc?

In our recent post, we provide details and support on how you can reduce your business debt and manage your finances more effectively.

Advantages of borrowing money

  • Supports business growth
  • Wide range of unsecured loans available
  • Keeps cash flowing
  • Reduces financial stress
  • Keeps you competitive

Disadvantages

  • Comes with a high cost of borrowing
  • Higher interest rates

How to manage borrowed money

When you take out a business loan or cash advance, it’s important that you:

Stick to a budget – keeping the loan in a separate account and only using the money for what it was originally intended can help to keep things on track and stop you from spending the money all in one go.

Check your business credit score – we base your business’s creditworthiness on the business’s financial history, i.e., how likely are you to repay the debt?

Pay back your loans on time, every time – just like avoiding late payment of commercial debts and receiving an overdue payment letter, make sure you file your accounts on time, make all repayments as per your agreed schedule, and work with debt recovery agencies where appropriate.

Late Payments of Commercial Debts

Small businesses are the heart and soul of the UK economy, and to continue operating, growing, and succeeding, invoices must be paid on time, every time.

That’s where we can help.

Supporting you with the collection of overdue invoices and commercial debt, call our team today on +447860197476 or email us on memberbenefits@directroute.co.uk to see how we can help you keep your cash flow flowing.