Your 5 Step Guide To Obtaining A Commercial Loan
There may be occasions when an injection of finance into a business via a commercial loan at just the right time can pay dividends.
Such a business loan can be used for a number of purposes including boosting working capital, purchasing an important business asset or piece of equipment, paying off crucial liabilities, expanding or growing the business plus a wide range of other business uses.
An accredited finance broker, like Anglo Scottish, can help in sourcing finance for a range of uses and with different options to suit your particular needs.
Before you make any decisions, here is a quick guide to the key issues you should consider.
1. Match type of commercial finance to purpose
- Short-term bank loans and overdrafts are suitable for covering temporary cash needs but may be risky if used for funding long-term needs such as new equipment.
- Specialist finance – such as asset finance for business equipment or commercial mortgage for property – is often available at better rates than general business loans.
2. Know what it takes to get a business loan
- Be clear what you need: the purpose, amount and length of the agreement, and if it’s equipment finance, whether you want to own the kit at the end of the agreement.
- Be wary of paying an upfront fee for someone to arrange finance, it could be a fraud.
- Some lenders may require additional security, including a personal guarantee from the business owners or directors.
- ‘Alternative’ finance lenders, including peer-to-peer and crowdfunding firms, can help when finance might be difficult to source, but they might be expensive compared to ‘conventional’ lenders.
3. Compare your bank’s commercial loan terms
- Tick all the banks’ boxes? Whilst it may not be easy, sometimes banks can offer a competitive deal and it makes sense to start with the bank holding your business current account, as it should already know your business.
- Banks will limit their business lending to any single business to manage their risk and will often require additional security.
- The bank may use the Government’s Enterprise Finance Guarantee scheme to help it to offer a commercial loan, but there’s a 2% fee each year, and don’t expect any leniency on paying the loan back.
- The Government now requires banks to offer to refer unsuccessful business loan applicants to designated finance platforms (websites) that can help the business find another source of commercial finance, but using a business finance broker is still likely to be the easiest and most effective way to find commercial finance loans.
4. Consider using a business finance broker
- There are over 100 commercial finance lenders in the UK, and no two are the same, so rates can vary considerably depending on their specialities for different products and different types of customers (e.g. stage of business development, size region and sector).
- A business finance broker can do the legwork for you, and can often obtain better commercial loan terms by going direct to lenders (see our blog on how to choose a business finance broker).
- Equipment finance offered by manufacturers or equipment suppliers is sometimes subsidised (e.g. interest-free credit) but often better deals can be obtained through a business finance broker.
5. Understand the commercial finance agreement
- Look at the total cost of the agreement, including any possible fees or charges that might not be included in the ‘headline’ interest rate.
- Factoring and invoice discounting are more complicated products and expert advice from a specialist commercial finance broker or accountant is advisable.
- If your finance is arranged by an equipment supplier, you might be promised things that are outside of the finance provider’s agreement, such as free accessories or supplies, cash rebates, upgrades, transfer of ownership, etc. but if the promises aren’t in the finance provider’s agreement, there’s a risk they might not be honoured.
- If you are using a reputable business finance broker, they should help you to understand the finance agreement and ensure that the terms are reasonable and competitive.
For expert advice on how to obtain a commercial loan, contact our team of advisors at Anglo Scottish Asset Finance. We can provide you with sound advice on how to get finance for your business in a cost-effective way, which works with your requirements.