The most simple type of funding is a loan. A loan is a credit, usually in the form of cash, that you borrow and repay over an agreed length of time. Loans can be obtained from banks, community development finance institutions, other businesses and even friends and family.
The amount of interest you will have to repay will depend on how much you have borrowed, how long the repayment period is, whether the loan is secured, and other factors such as the Bank of England base rate. The interest rate may be fixed or variable.
Funds from a loan are generally suitable for financing a start-up or paying for assets. Loans can be tied to the lifetime of the equipment or other assets for which you’re borrowing the money. Loans are not payable on demand and you won’t have to give away any equity in your business or share any profits with the lender.
Bank business loans will usually be individually priced and have negotiable terms and conditions. To apply for a loan, you will need to prepare a loan proposal, which covers the figures of your business, how much you would like to borrow and how you will repay the loan.
Banks will also want information about your business, such as the structure and size in order to assess your risk value. It is a good idea to prepare a Business plan and include financial projections and accounts. Banks are more willing to lend more to a company that has assets that can be used as collateral.
Bank interest rates can be fixed or variable. Business loans can be offered for far longer terms than personal loans. This might mean lower repayments but ultimately more interest to pay over the term.
A simple way to obtain a loan is from friends or family. They are more likely to trust you and offer a lower interest rate than a financial institution. Make sure to formalise your agreement using a Promissory note.
There are companies such as Funding Circle, which facilitate lending between private lenders, (often multiple lenders at the same time). This is also known as peer-to-peer lending. The repayment terms can be more generous and flexible than those of a bank.
A micro-loan (also known as a small business loan) is a small (usually for an amount between £5,000 to £25,000) short-term loan with a low-interest rate. This can be used together with other types of funding. Certain banks offer these types of loans.
Business to business loans
A parent company or related business may be willing to loan another business funds. Make sure to record this transaction securely using a Loan agreement.
Enterprise Finance Guarantee loans
Enterprise Finance Guarantee loans are another funding option available to businesses looking to expand. The EFG provides the lender with a government-backed guarantee and can therefore facilitate lending to smaller businesses that have otherwise not been able to obtain finance. Participating lenders range from the main high street banks to smaller-scale specialist institutions.