What are business loans?

28

Sep

What are business loans?

posted by: Jason Hulott

Here we’ll clarify some of the terminology used in business loan discussions. These represent some of the questions Cubefunder’s customers have asked over time.

Business loans

This term is used to describe any form of lending that’s made to a company which is a defined and registered legal entity – such as a Limited Company (LTD) or Public Limited Company (PLC).

There are important differences between business and personal loans.

Guarantees

These usually apply in circumstances where the borrowing company is seeking a loan that is not secured by one of its own assets.

In the case of such unsecured lending, the lenders may require personal guarantees from the borrowing company’s directors. Essentially that means the directors guarantee they will repay the loan if the company is unable to do so.

Secured loans and unsecured loans

This normally means:

  • secured loans offer the lender the security of knowing that if the borrowing company is unable to repay the loan, there is an asset (property, plant etc.) that can be sold to recover the outstanding amount;
  • unsecured loans have no asset guarantee but may require directors’ guarantees.

Risk assessment

Any lending involves a degree of risk for the lender. That usually implies the risk of not getting their money back (or a substantial part of it).

Lenders will apply techniques to measure and asses the risks associated with a given application for funding. The risks, as they see them, may influence how much the loan will cost. In some cases, very high-risk assessments may result in a loan application being refused.

Loan application decision in principle

We will quickly give you a decision in principle in response to your funding application.

That will be confirmed in due course, once we have all of the required information to hand relating to your company and the specifics of the request.

If the application is formally approved, the funds could be with you in 48hours.

Merchant account loans

Merchant account loans are typically smaller loan sums that are requested by companies accepting electronic card payments.

In a sense, merchant account loans are a form of borrowing/lending based upon anticipated payment receipts.

Company status assessments

Lenders are obliged, by codes of best practice, to protect the interests of their own company and if appropriate, its shareholders. As part of that, they need to try and ensure that any company they are lending to is a relatively safe prospect in terms of being able to service (i.e. repay) its debts.

The techniques for doing so may vary. Typically they will involve some investigation of the borrowing company’s historic accounts, profitability and balance sheet. In some cases, where directors’ guarantees are involved, credit history checks against individuals might also be required.

This process is also in the best interests of the borrowing company, as borrowing more than can be sensibly afforded is typically not advisable.

Term of the loan

This might mean either:

  • specific terms, as in terms and conditions, applied to the lending or;
  • the period over which repayments will be made.

Positive or negative justifications for borrowing

There is no standard definition here and lenders may use different terminology.

After due review of an application for a business loan and assessment of the applying company, potential lenders may see the core position as being positive or negative in terms of risk assessment.

Positive justifications might include loan applications relating to:

  • re-equipping;
  • expanding the business;
  • export drives;
  • moving into e-commerce;
  • short-term cash-flow problem mitigation
  • developing new product lines.

There are no firm rules here and much is related to the interpretation of a given situation. However, typically it may be more difficult to find business loans for reasons perceived to be negative as opposed to those seen as positive.