By Gary Hemming, ABC Finance
The business loan market is changing. Gone are the days of waiting nervously for an appointment with your bank manager only to embark on a lengthy application process for a business loan.
There is a new breed of Business loan lender out there, often powered by fintech systems that are making the business loan process quick and simple.
The different types of business loan
As mentioned above, the market is changing – rapidly.
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There are more types of business finance product than ever and its opening up a whole new world of funding for small business owners.
Traditional business loans are still out there, and on the face of it, they’re similar to the loans offered by high street banks.
There are plenty of changes in the background though, with peer to peer lending currently the fastest growing area of financial services.
On top of changes to the way loans are funded, there are new and innovative products such as the business cash advance and standalone revolving credit facilities.
Standalone revolving credit works in a similar way to the traditional overdraft, except that it isn’t attached to your bank account.
Facilities can often be managed online, with funds drawn down into your bank account within hours when needed and repaid whenever suits.
In addition to these unsecured products, there is still a thriving secured business loan market and asset finance and invoice finance are still strong options for releasing funds quickly.
Business loan lenders
There is a wide range of Business loan lenders out there, with new lenders continuing to enter the market.
Each lender has their own criteria, rates, fee structures and way of assessing applications.
High street banks
High street banks tend to be the most well-known lenders and are usually the most conservative.
When approaching a high street bank for a business loan, you can expect a low-interest rate if accepted.
The downside, however, is that you’re likely to have to endure a slow and detailed application process. In addition, strict lending criteria mean that it may be difficult to be approved.
Challenger banks presence in the commercial finance market is growing. Most loans offered by challenger banks tend to be secured against property, although some will consider unsecured lending.
You can expect a challenger bank to take a more bespoke view of your circumstances rather than working to strict ‘tick box’ criteria.
Challenger banks will usually charge more than high street lenders but can be more flexible in the approach.
Peer to peer & online lenders
When it comes to business loans, the peer to peer lenders and those operating through online platforms are taking the market by storm.
Lending tends to be flexible, and application processes fast and simple, usually online.
Some lenders are even offering very low rate loans, as low as 1.9% currently, although only a small percentage of applicants will achieve such a low rate.
The downside to online lenders is that you lose a lot of the face to face relationship that can be built with a bank (although some would say that even banks are failing to sustain personal relationships these days).
In addition, although you may be more likely to be approved by peer to peer and online only lenders, if your application is considered higher risk, you may have to pay a premium for your money.
Key points to consider before taking on a new business loan
When looking to take out finance for your business, it’s important that you consider your options in detail before proceeding.
Failure to be clear in your position before starting out can lead to you selecting the wrong product and losing out financially.
How long the money is needed for
Before selecting a product, decide how long you will need the money for, and whether it’s a one-off requirement.
If you will need to borrow each month, a revolving credit product may be more suitable than a traditional business loan.
Your monthly budget
Set a monthly budget before speaking to anybody. You should be clear on the maximum affordable repayment before starting.
Interest rates and total cost
Some products offer very low-interest rates but load your application with fees. This increases the total cost of borrowing and may mean that a higher rate product actually works out cheaper.
To avoid this situation, always consider the total cost of borrowing as well as just the headline rate charged.
Are you likely to repay the loan early?
If you’re likely to repay the loan early, it may be a good idea to look for a product with no early repayment charges (otherwise known as penalties).
Triggering an early repayment charge can significantly add to the cost of borrowing and should be considered upfront.
The documents needed to apply
Always endure you have some basic documents ready to go before beginning an application. Most lenders will simply place your application on hold while they wait for your documents, so it makes sense to have them ready upfront to avoid delays.
Commonly requested documents include:
- Proof of ID and residency
- Latest 2 years trading accounts
- 3-6 months Business bank statements
Using a broker vs direct to lender
As there are so many new business loan lenders out there, it can be difficult to get quotes from them all.
A good business loan broker will be able to work with you to find the best deal and most don’t charge a fee for their service.
If you’d like to go it alone, it’s best to create a plan of which lenders you would like to speak to and then work through them one by one.
Whichever route you choose, it’s important that you search for the best deal as the cost between lenders can be significant.