Friday, October 13, 2006

Start Up Business Loans

The reasons you may require a business loan can vary:

1.starting out in business.

2.securing working capital.

3.expansion of your business capital expenditure.

4.refinancing and restructuring the balance sheet.

And because of these many reasons the type of business loan which is best suited to you varies greatly.In general a standard business loan will provides probably the most flexible solution to meet your financial needs, but it may not be the cheapest type of finance.

Other type of Suitable commercial finance could be :


A means of raising finance from your outstanding invoices.

Invoice Discounting :

Invoice finance for larger companies.

Assest Finance:

Used the purchase assets which secure the loan.

Commercial Mortgages:

Finance for commercial property.

Trade Finance:

Used by importers and exporters to fund goods.

A business loan is a contractual agreement between the lender (usually a bank) to provide money to the borrower with the borrower agreeing to repay the money with interest, over time.

The size, interest and repayment terms of a business loan can be tailored to your requirements by the bank therefore you must carefully consider the impact of repayments before you agree to borrow.

This introduction has been written as a general guide and does not constitute professional advice therefore you may wish to consult your and advisor or your account before progressing with a loan agreement.

How do business loans work?

The three most important aspects to consider when looking at business loans are:

  1. Interest rate
  2. length of repayment
  3. security (what is the loan secured against?)

Loan security:
In order for most banks to agree to provide a business loan or an overdraft there must be some form of security in place – something which makes the bank feel more comfortable that the loan will not be defaulted on and, if it is, something which can be used to raise money to replace that which has been lost .

The security may include the rights to all book debts or may relate to specific assets owned by you.

Business loan interest rates:

Generally there are two types of interest rate which are charged:

  • Fixed rate:The interest rate applied to the outstanding loan amount remains constant through out the agreed period of the loan. The advantages of a fixed rate loan is that payment are always constant and therefore can be modeled into your business plans i.e. and they will not rise if market rates rise. The disadvantage is that you will not benefit from a decline of the market rate.
  • Variable rate:The interest rate applied to the outstanding loan amount fluctuates in line with changes to the bank base rate. The advantage of a variable rate loan is that you save money when the market rate decreases. The disadvantage is that you are not protected from an increase in the market rate.

Length of repayment:

Remember: the longer it takes you to pay back the principle (the total initial value of the money lent), the more total interest you will pay i.e. the faster you can pay the loan, the cheaper the loan will be. It is therefore very important that you consider what type of repayment schedule you opt for. Here is a sample:

  1. Equal Payments:This type of loan requires you to pay the same amount each period (monthly or quarterly) for a specified number of periods. Part of each payment goes toward interest and the rest goes toward principal. After the specified number of periods you will have paid back the entire loan plus all interest.
  2. Equal Payment/Final Balloon Payment:This type of loan requires you to make equal monthly payments of principal and interest for a relatively short period of time. After you make the last installment payment, you must pay the balance in one payment, called a balloon payment. Some lenders will give you the option to refinance the loan to help you stretch out the final balloon payment.
  3. Interest-Only Payment/Final Balloon Payment:With this type of business loan, your regular payments cover only the interest being charged on the loan. The principal sum stays the same. At the end of the agreed term a balloon payment is made to cover the entire principal and any remaining interest.
  4. Single Payment of Principal and Interest:If the bank agrees, you can opt to pay off the loan all at once at a specified date. This payment includes the entire principal amount and any accrued interest.
  5. Equal Principal Payments:This type of business loan requires you to pay the same amount of principal on a regular basis for an agreed period. The total payment for each period will be variable, declining over time, as you pay interest only on the outstanding principal at the beginning of the period.

View our recommended sources for Unsecured loans & Online loans information.


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