5 must-know business loan basics for start-ups
Choosing to borrow funds is a smart choice if you are confident you can meet the repayments. But there are some things you need to know...
To help you understand the market and your options better, this article will discuss five must-know business loan basics for start-ups.
The search for a cash injection to get your business off the ground can be hindered by the dizzying number of unfamiliar terms and lending options.
What’s the difference between a secured and an unsecured loan, and where can you find the best rates?
Read on to find out…
1. What is APR?
Annual Percentage Rate
APR stands for Annual Percentage Rate. It describes the cost of borrowing over a year. It is useful for comparing products between lenders.
In simple terms, APR is the cost of borrowing money. It’s the official rate used for borrowing and, when calculated, it includes the cost of borrowing and any associated fees. It offers the most accurate assessment of loan cost. APR varies from lender to lender. The lower the APR on a loan, the less you will pay back for borrowing it.
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2. Independent lenders offer better rates than big banks
These lenders typically offer the best interest rates
You might be tempted to go with your high-street bank for your start-up loan. The issue with doing so is the APR offered. A quick look right now reveals that one of the UK’s biggest banks is offering start-up loans from 7.4% APR – and that’s a lot.
Compare that to the entry rate of 3.6% APR offered by a reputable independent lender, and you can see how big banks are milking it. Independent lenders are a great choice for start-ups for this reason. Borrowing with them is more affordable.
3. Secured loans are for larger amounts
They are the best choice for high-risk, high-value start-ups
If you want to borrow more than £50,000, a secured loan is what you will typically be offered by a lender. Secured loans are available up to any amount in theory, although most lenders cap it to £500,000. This type of loan is also called an ‘asset backed loan’.
Secured loans are secured against an asset. This can be anything owned by the business or a director of the business. Property and vehicles are common collateral. The biggest benefit to secured loans is they typically have a lower interest rate than unsecured loans.
4. Unsecured loans are for smaller amounts
They are also more accessible than secured loans
If you want to borrow £10,000 to £50,000, it is likely you will be offered an unsecured loan. Unsecured business loans are available for smaller amounts and allow you to borrow money for your start-up with an agreement you’ll make regular repayments.
What’s to stop you from falling back on repayments? Court action. This type of loan has strict repayment terms. If you default, you will be pursued for payment. This is the security in place for the lender, but a non-issue for healthy start-ups.
5. You can also refinance your assets to raise capital
To raise quick capital for your start-up
If you have assets of value in your business, such as IT equipment or plant machinery, you can release additional funds by refinancing them.
Refinancing is the quickest way to raise capital for your start-up, and best of all, it’s 100% tax deductible if you offset the payments against your tax bill. You can also consolidate existing refinance agreements to release additional funds for your business. This might be a better option for your business than taking out another loan.