Securing a business loan is a pivotal step towards turning your entrepreneurial dreams into reality – but it’s not always easy. Navigating the world of loans and eligibility requires understanding a plethora of business loan terms and conditions.
So without further ado, in this guide, we’ll demystify the average terms associated with certain types of business loans (as well as typical amounts, interest rates and how to apply), providing you with the knowledge need to make informed financial decisions. Let’s dive in.
Business Loan Terms and Their Variations: Deciphering the Jargon
When it comes to business loans, one size certainly does not fit all. Depending on the type of loan you’re seeking, you’ll encounter distinct terms and conditions. Let’s explore some key differences:
Business Loan Terms: Banks
When seeking a business loan from a traditional bank, it’s essential to familiarise yourself with their specific business loan terms (UK).
Average Loan Term
Traditional bank loans have a longer loan term length, ranging from 5 to 25 years. This provides borrowers with ample time to repay the loan in manageable instalments.
Maximum Loan Amount
Since banks tend to have higher lending capacities, they are usually suitable for companies requiring substantial business expansion financing. Depending on factors like creditworthiness and collateral, banks can offer a business loan agreement worth several million pounds.
Typical Interest Rate
Banks typically offer competitive interest rate options, especially for those with a strong business credit score. Rates currently range from 2% to 13%, depending on various factors.
Time to Apply
Applying for a business loan from a bank may involve a more extensive process compared to alternative lenders. It’s not uncommon for the application and approval process to take several weeks due to rigorous underwriting standards.
Minimum Eligibility Requirements
Banks often have stringent eligibility criteria. They may require a solid credit score (typically above 700), a well-documented business plan and financial statements. In some cases, there are also collateral requirements.
Small Business Administration (SBA) Loans Terms
For entrepreneurs seeking government-backed financial support, Small Business Administration (SBA) loans are a popular choice.
Average Loan Term
SBA loan terms are often longer, extending up to 25 years for certain loans. Equipment and working capital loan terms typically range from 7 to 10 years.
Maximum Loan Amount
SBA loans can provide substantial funding for businesses. Depending on the type of SBA loan, borrowers can access amounts ranging from £50,000 to several million pounds.
Typical Interest Rate
SBA loans can usually offer competitive interest rates – and these rates are typically lower compared to conventional bank loans. Note that the rates will vary based on factors such as loan amount, term, and the lender’s policies.
Time to Apply
The application process for an SBA loan may take longer than with other lenders due to the government’s involvement. It’s common for the process to span several weeks as it involves thorough evaluation and approval by both the lender and the SBA.
Minimum Eligibility Requirements
While SBA loans aim to support small businesses, there is still loan approval criteria. This can include factors like a minimum credit score, demonstrated ability to repay the loan, and adherence to SBA size standards for small businesses.
Business Lines of Credit (LOCs) Terms
A revolving credit facility, also called a Business Line of Credit (LOC) provides a flexible funding option for businesses. Here are the key terms to consider when exploring this financing avenue:
Average Loan Term
Unlike traditional term loans, a line of credit doesn’t have a fixed term. It’s a revolving form of credit, allowing businesses to borrow and repay funds repeatedly, as long as they stay within the credit limit.
Maximum Loan Amount
The maximum credit limit of a business line of credit varies widely depending on factors like the business’s creditworthiness, revenue, and the lender’s policies.
Typical Interest Rate
Interest rates for lines of credit can be variable or fixed. The rate largely depends on the lender, the borrower’s creditworthiness, and market conditions. Variable rates are typically tied to a benchmark interest rate, such as the Bank of England Base Rate, plus a margin.
Time to Apply
Applying for a business line of credit with Aurora Capital is generally quicker compared to some other forms of financing. With streamlined online applications, businesses can often get approval and access to funds in a matter of days.
Minimum Eligibility Requirements
For a successful revolving credit business loan application, businesses are generally expected to have a reasonable credit score, steady revenue, and a demonstrated ability to repay.
Merchant Cash Advance
A Merchant Cash Advance is an alternative financing option that offers quick access to capital. Here are the key business loan terms and conditions associated with Merchant Cash Advances:
Average Loan Term
Merchant Cash Advances are typically short-term financing solutions, with the loan term length ranging from a few months to a year. The repayment is tied to a percentage of the business’s daily credit card sales.
Maximum Loan Amount
The maximum loan amount for a Merchant Cash Advance is determined by the business’s average monthly credit card sales. Generally, it can range from a few thousand to several hundred thousand pounds.
Typical Interest Rate
Instead of an interest rate, Merchant Cash Advances use a factor rate, which represents the cost of the advance. While not an annual interest rate, it provides an equivalent cost when spread over the business loan term.
Time to Apply
Applying for a Merchant Cash Advance is usually swift and straightforward with Aurora Capital. With a quick online application process, approval can often be granted within hours, and funds disbursed in a matter of days.
Minimum Eligibility Requirements
While these loans are more lenient compared to others, businesses typically need to be in operation for a minimum period, usually around six months. Lenders also consider the business’s monthly credit card sales volume as a key factor.
Inventory Financing
Inventory or Asset financing is a type of short-term loan specifically designed to help businesses purchase equipment or machinery. Here are the key business loan terms associated with it:
Average Loan Term
Asset financing is typically a short-term loan, often with terms ranging from six months to two years.
Maximum Loan Amount
The maximum loan amount for inventory financing is determined by the value of the inventory being financed. Lenders may provide financing for a significant portion of the inventory’s value, often up to 80%.
Typical Interest Rate
Interest rates for inventory financing can vary widely (from around 7% to 30%) depending on the lender and the result of the borrower’s creditworthiness assessment.
Time to Apply
Applying for inventory financing usually involves a thorough assessment of the inventory’s value, which may take a little longer than other types of financing. Once approved, funds can be disbursed relatively quickly.
Minimum Eligibility Requirements
Lenders offering inventory financing will assess the borrower’s creditworthiness, business financials, and the quality and value of the inventory being used as collateral. Equipment financing terms may also require a consideration of the borrower’s industry and market conditions.
Need Expert Advice for Your Business Loan? Get in Touch With Aurora Capital
Understanding the various terms associated with different financing options is essential for making informed decisions about your financial future. Whether you’re considering traditional secured business loans and unsecured business loans, exploring options through the Small Business Administration (SBA), or looking into revolving credit, having a clear understanding of the terms involved is crucial.
At Aurora Capital, our team of experts is dedicated to helping you find the right loan product with terms that align with your business goals. We can guide you through the application process, ensuring you meet all eligibility requirements and understand the implications of the business loan terms.
Don’t navigate the world of business loans alone! Reach out to Aurora Capital today for expert advice and personalised financial solutions.
Business Loans Terms UK: FAQs
Business loan terms refer to the specific conditions and details outlined in a loan agreement. They include elements like interest rates, repayment schedules, collateral requirements, and other crucial factors that dictate how the loan will be structured.
Business loan terms in the UK can differ based on the type of loan and the lending institution. This includes variations in interest rates, repayment periods, eligibility criteria, and documentation requirements.
Collateral serves as security for the lender in case of default. Loans with collateral typically offer lower interest rates and more favourable terms compared to unsecured loans.
Prepayment penalties are fees imposed by lenders if a borrower pays off a loan before the agreed-upon term. Understanding these penalties is crucial for businesses considering early loan repayment.
The loan maturity date is the deadline for repaying the loan in full. It impacts the length of time available for repayment and influences the overall cost of the loan.
In some cases, business loan terms can be negotiated, particularly with certain types of lenders. However, it’s important to carefully review and understand any proposed changes before finalising an agreement.
