Which small business loan is right for you?

All you need to know about loan and overdraft finance.

Getting a business loan for a small startup can seem daunting, but with so many options available its important that you choose a business start up loan that is right for you and your business. Access to credit facilities, such as an overdraft or small business loan, are popular reasons for opening a bank account.

Overdrafts tend to be more flexible and do not carry the same onerous requirements of security of a loan.

However, they have to be rearranged on a regular basis, probably every six to twelve months, and can be called in at any time.

You will also find it expensive if you exceed the limits.

Overdrafts are more suited for day-to-day expenses incurred through running the business. It is not suitable for capital expenditure or to cover startup costs for any length of time.

In general there has been a shift away from offering overdrafts to small businesses.

The BBA figures show that overdrafts make up less than 30% of lending by banks.


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This is the lowest amount since 1992, when the figures were first collected.

Much of this is due to the fact that many businesses had survived on large overdrafts before the last recession, according to the Bank of England in its 1999 paper, Finance for Small Firms.

The subsequent economic downturn proved to have a sting in the tail for all as overdrafts were called in.

When businesses could not repay the overdrafts, many were starved of vital cashflow and consequently failed.

“The bank’s primary concern was security. But in a recession it is not about security, it is about ability to repay,” explained Bob Gunning, regional commercial director of the Royal Bank of Scotland.

Bank lending is now more likely to be decided on the basis of ability to repay rather than the security that a business can offer.

If you are planning to buy a piece of equipment or other assets, it might be a better idea to consider a small business loan.

A small start-up should benefit from this as, unlike an overdraft, the bank cannot ask for full payment unless the loan conditions are breached and you are guaranteed that money for a certain period.

Banks believe that this will make them more consistent lenders, rather than being forced to rein in credit as the economy takes a dive.

Banks also tend to prefer the regular payments that they receive from a business loan.

Small startups can end up running up large overdrafts if such a regime is not imposed on them, so this makes them a safer bet.

If you are buying some equipment for the business, a business startup loan can be tied to the lifetime of the asset that is being purchased and with regular payments the amount can come down gradually during that period.

Choosing business loans

Small start-ups have to decide whether to take a floating or a fixed rate of interest.

A floating rate varies as the base rate of interest moves while a fixed rate is specified for the term of the loan.

However, it is now possible to choose different terms and conditions as well as currencies to repay it.

Business loans for start-ups are one way to keep your business afloat but they are by no means that only answer to cash flow problems.

Most banks will also be able to offer other debt finance such as factoring or leasing arrangements.

Increasingly banks are looking to expand the sums of money available and experimenting with equity finance.

For example, RBS runs two funds in the East of Scotland that invest equity sums in fast-growth companies that would struggle to repay conventional bank debt.

Amounts on offer will vary but can be significantly higher than that available through debt finance.

Overdrafts are more suited for day to day expenses incurred through running the business.

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  1. An overdraft is great for short term dip-in & out usage, but if you find that you need to operate in the red continuously then a loan is better. Look at peer to peer lenders who do not have early repayment charges, meaning that you have some similar flexibility to an overdraft without the associated fees which can be 3% over base per month for many banks.