Given that the UK government lost £4.9 billion to Covid loan fraudsters in the UK, it’s little wonder that the concept of small business borrowing is under the microscope in 2022.
However, small and independent businesses continue to require funding in the current economic climate, especially if they’re to achieve their objectives and scale in the most manageable way.
But how do small business loans work, and what are the main benefits of this type of transaction?
How do Small Business Loans Work?
A small business loan is typically secured, which means that the amount borrowed by applicants will be secured against corporeal assets such as a business’s premises or equipment (depending on what’s included on their balance sheets).
If approved, this type of SME loan enables owners to borrow a pre-agreed amount of cash upfront, before repaying this sum (at a predetermined rate of interest) over a fixed period of time.
Typically, the length of the agreement will depend on the amount borrowed, while it’s fair to surmise that interest rates are typically lower with secured loans as the lender is able to offset their risk through the use of collateral.
What are the Benefits of Small Business Borrowing?
Of course, applying for an SME loan is just one way in which you can fund your business’s growth in the current climate.
However, there are certain benefits to taking out a business loan. Firstly, this enables you to secure the desired level of capital without yielding any control over how the capital is spent, which isn’t always the case with private investors or venture capitalists.
As we’ve already touched on, secured business loans also offer particularly low interest rates. However, most SME loans in the UK are competitively priced, including unsecured options that tend to increase the risk in the eyes of lenders.
In some cases, any interest applied to your loan is also tax deductible, creating a further financial advantage for your firm.
How to Apply for a Small Business Loan
When applying for a business loan, there are several common mistakes that can impede your application.
The first is failing to understand your responsibilities as a borrower, especially in terms of achieving the loan’s requisite credit score and providing information to help process your application.
You’ll definitely have to demonstrate that your business is trading and boasts a viable annual income, so company accounts will also need to be in order and reported accurately.
We’d also recommend comparing the market to find the most suitable and competitively priced loan package ahead of time, based on factors such as cost, duration and the interest rate applied.
