• Monday , 20 November 2017
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Bank Loans

A bank loan costs less to arrange than equity finance, although the repayments can be constricting as they need to be repaid and will collect interest. Some will have a fixed interest rate that is determined before the loan is issued. Others, however, will have a variable rate, meaning the interest rate will fluctuate. Bank loans are usually secured for moderate to large sized financing. While a bank loan allows the company owners to remain sole shareholders, it does place the company in a position of bankruptcy should it default on interest or repayments.

In Brief:

  • Good for working capital and medium-paced expansion
  • Owners retain control and avoid interference from a backer
  • Raising between £50,000 and £500,000 is possible
  • Assets and track record of the management are key
  • You may have to make personal guarantees, such as putting your house up as security

PROS

  • Bank Loans are cheaper and easier to obtain than equity finance
  • You do not have to give up any control of your business to a backer

CONS

  • Businesses with little trading history may find larger loans hard to obtain
  • Defaulting on repayments or breaching conditions may mean paying back in full

Secured bank loans are typically repaid over three to five years at a fixed or variable rate of interest. They usually have a lower interest rate than overdrafts (which are often used as a short-term cash ‘buffer’) and are repaid over a shorter period than commercial mortgages (although a loan can also be used for purchasing premises). But do bear in mind that nearly all term loans are still repayable on demand.