Business loans: should I get one?

We’ve all been there – asking for money is just awkward. This doesn’t change as a business owner, and launching your own business can be a costly affair. But the good news is that you don’t have to sit and squirm, wondering how to ask friends or family for some cash to keep going – there are several options available to you.

One of these options is to take out a business loan. Although the concept of a loan might seem daunting, and perhaps even unnecessary at first, it could be a trusty helping hand.

What is a business loan?

Business loans provide business owners with money to start, maintain and improve their business. You can take out either a secured or an unsecured business loan.

  • Secured – An asset (such as your car, house or something else of value) will be put against the loan to secure payment to the creditor. If you are unable to repay the loan in the future, the lender has the right to take possession of the asset, in order to retrieve the amount they are owed.
  • Unsecured – unlike a secured loan, the lender will lend you money based on your agreement to repay it. None of your assets will be put up as collateral, so if you found yourself unable to repay the loan, the lender will likely take legal action to retrieve the outstanding amount.

Who can apply for a business loan?

Business owners often wrongly believe that their enterprise is too small to be eligible for a business loan. In fact, any trading company can apply for a business loan, regardless of their size.

The most common types of loans include regular bank loans, revolving credit facilities, peer-to-peer loans, invoice finance, cash advances, government start-up loans or working capital. There’s often no set limit to the number of loans a single business is able to take out, but you’ll be required to prove that your business can afford to repay the loan during the application process.

What can a business loan be used for?

Finding out that a loan application has been approved is music to a business owner’s ears. But before you splash out on company cars and a private jet, come up with a strategic plan for how you’ll spend the funds. Below are some common reasons that business owners decide to take the plunge and kick start their loan application:

  • Expansion
    If business is going well, it often calls for a bigger office or an increase in headcount. But booming business doesn’t always mean you have the necessary funds to keep up with the demand and operational costs. A business loan can help you grow, while ensuring that your profits don’t take a hit.
  • Building Credit
    Being approved for a business loan – and paying it back on time – can put you in good stead for future loans and credit applications. Taking out a smaller loan initially can make you more likely to be approved for a larger loan later down the line. So if you think you’ll need a bigger loan at some point in your business’s future, you may wish to apply for a smaller one first to prove that you’re creditworthy, and can comfortably meet all of the repayments. Building credit is important, and it’s worth keeping an eye on your score – you never know when you might need a little extra help.
  • Equipment
    Having the right equipment is essential if you want your business to succeed. Beyond just desks and telephones, it’s worth ensuring that you and any employees have the tools you need to perform your roles to the best of your abilities. If you can’t afford the equipment that’ll help to take your business to the next level, a loan can help you cover the cost and repay them over a reasonable timescale.
  • Inventory
    Inventory is the material or stock purchased by a business to produce goods or provide services. Once your business is in operation, you’ll need to continually invest in inventory. The tough bit is that you’ll need to stock up before you can start selling to customers, meaning that you need to speculate when making inventory purchases. After all, if you have no inventory, then you can have no custom! Whilst inventory expenses can be difficult to stay on top of, a loan can help you make the purchases upfront, allowing you to pay the loan back with any money you take in from sales later.
  • Business Opportunity
    If you’ve been offered a great business opportunity which you think will pay off in the long run, you may choose to take out a loan to take advantage. Whether it’s a great price for a new larger office, or a brilliant deal on equipment, a loan can help you to take the plunge at the right time for your business. Be careful to do your calculations correctly though – ensure you don’t borrow too much or too little, and be sure that the potential return on investment will be greater than the loan amount.

So, do I need a business loan?

Hopefully, you’ll now have a better understanding of what a business loan is, and what it can be used for – and you can begin to determine whether your business needs one. Be sure to fully analyse the affordability of taking on a loan, and ensure that it’ll have a positive impact on your business.

Richard Myers
Commercial Director at Transmit Startups

Tide Partner

Get started with modern business banking