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Is a bank loan always best for your business?

Published on 28th May 2015 - Last update on 21st September 2018

In years gone by, the traditional bank loan would be the first port of call for any business owner. Alternative funding like peer-to-peer lending, crowdfunding and angel investors has seen a huge rise in demand. While it’s tempting to follow the crowd, the humble bank loan still has a lot to offer the business owner. According to the British Banker’s Association, total loans from UK banks to SMEs stood at a whopping £89.7bn at the end of last year.

What do you need capital for and when?

A business loan is ideal for initial start-up costs, or for purchasing large assets or machinery vital to your business. Being able to inject a hefty sum where you need it can help you expand, giving a boost in both profits and working capital. However, getting a loan can be a lengthy process – there will be lots of phone calls, paperwork and finances to juggle before your bank agrees to sign on the dotted line. If you need capital and you need it right now, consider looking at alternative finance sources who could stump up the cash in a matter of weeks.

How much control would you want?

The greatest advantage to taking out a bank loan is that you retain full control over your business and more importantly, your profit. On top of all this, bank loans typically offer longer repayment terms than alternative sources of funding. If you’re using the funds to cover equipment or other assets, you can even set the repayment terms in line with its natural lifespan. However, some banks may require regular updates on your finances and many will charge for funds not used or for an early repayment fee.

Can you afford the repayments?

Of course, once you’ve got your money, you need a clear repayment plan. Secured finance loans are typically held against your home or other owned assets. If you are just starting out, this is the only type of bank loan you are liable to get. Miss your payments and you could lose your house. Ask yourself, is it worth the risk? If your business is in a stronger position, unsecured finance could be an option. Your home is safe, but the risk to the bank will be reflected in a higher interest rate. If you simply don’t know if you could keep up with repayments, consider some form of equity finance, but know that you will be giving away a stake in your precious business.

What about interest rates?

Business loans with a variable interest rate can work in your favour when interest rates are low, but if they were to rocket, you would need to be confident you could find the money to pay them. Alternatively, a fixed rate loan makes it easier to budget your repayments accordingly. For some, this peace of mind makes them more attractive than a loan with a variable interest rate. Whichever you choose, interest rates from a bank loan will generally be lower than those from an overdraft. So is a bank loan the best for your business? Well, that all depends on your business needs, of course.

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Sarah Thornton

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