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.
- 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
- 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
- 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.