Topic overview

Business loans

Business loans

Borrowing can be a key part of business funding, alongside any equity finance you and other investors have put into the business. The right types of business loans help you maintain financial flexibility, ensuring that you have the funding you need without taking excessive risk or paying over the odds.

How much can I borrow?

Your business plan and cash flow forecast will show the overall level of financing you need. The plan will also help you assess how much debt is appropriate and affordable. The right mix depends on how risky the business is and what cash you expect to generate.

At the same time, the level of business borrowing you aim to take on may be influenced by how much investment you can raise, and how much lenders are prepared to support you. If high levels of borrowing are unacceptably risky, you may need to plan for lower - but more secure - levels of business growth.

Your business loan options

Overdrafts and bank loans are usually the first types of borrowing that businesses turn to. Ideally, overdrafts should be used as a flexible way of financing short-term cash flow needs, with long-term borrowing needs provided by loans.

Other forms of borrowing may also be suitable depending on your circumstances. Hiring or leasing allow you to spread the cost of financing equipment, while similar types of car finance can also cover servicing and maintenance.

High growth businesses that face a continually increasing need for working capital may want to consider factoring and invoice discounting. If you're involved in importing and exporting, more specialised forms of finance can help you manage the extra risks involved at the same time as providing additional funding.

Creditworthiness and borrowing

Of course your borrowing options will depend on what lenders are prepared to offer. This may be limited by how much security you can offer the lender in case things go wrong, and whether you are willing to provide a personal guarantee.

Lenders' attitudes, and how high an interest rate they charge, will also be affected by how creditworthy they think you are. This takes into account factors such as the business's overall level of debt and how well you have managed your finances in the past. For sole traders and smaller businesses, personal credit records may be included.

You may choose to keep all your business borrowing with your bank, but it can be worth shopping around to see what different lenders are prepared to offer. Some lenders may be more willing to support particular types of business or offer better rates.

The main banks also offer an appeal process if you're refused a business loan, and can put you in touch with other potential sources of finance.

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