Using Loans for Business
There are many reasons why applicants take out loans and using loans for business is one of the most common reasons for taking out unsecured finance in any form. There are however, a swathe of options when looking at business funding options. It is important that the correct and most suited finance for your specific business and sometimes industry is taken out as opposed to just applying for what may or may not be available.
It may be the case that you need some extra money to buy much needed equipment that is required in your business’ industry to progress and further succeed. Alternatively, your business may need some extra short-term staff to handle a busy and profitable period or perhaps as a retail business you need to buy a large amount of stock before some outstanding invoices are paid.
Whilst there are specific business loans available on the lending market, these can sometimes be a bit of a burden and may in fact sometimes add a burden to an already stressful time for you and your business. Loans such as merchant loans and merchant loan alternatives are particularly suited to retail businesses and shops (Source: Cube Funder). Other loan options that are available such as payday, instalment and guarantor loans may also be strongly considered too, as depending on your circumstances and the nature of your business, these loans can go a long way.
Merchant Loan Options
Merchant loans are perfectly suited to retail businesses and those that are able to accept credit and debit card payments from customers. What is more is that businesses that do not accept enough or any card payments are not able to apply for these loans at all.
These loans work by a lender providing a loan of a set amount which is then repaid plus interest through card transactions. The borrower will often have to change their merchant provider (the company such as World Pay or others); that is the company that deals with all of their card terminals and their payments. The lender will usually have an existing relationship with a card payment provider and will utilise this.
The benefit to the borrower however is that the loan works by the lender taking a pre-arranged percentage of monthly card revenue as payment for the loan. As this works on proportions as opposed to a set amount, it means that the borrower will pay more when business is booming and will pay less when things are a bit quieter.
The Benefits for Businesses
A major benefit of these loans is that lenders will very often lend up to 100% of the borrowing business’ monthly card revenue if required. This effectively gives a business a 100% advance on their monthly card revenue. For businesses who see a great deal of card transactions, this can make a big, positive difference.
A huge advantage of these loans is that the money is repaid continuously in very manageable instalments as opposed to all in one go at the end of a loan period as is the case with most other loan and funding arrangements. This makes the loan almost incorporated into the business’ cashflow after a fairly short period of time.
However, there are a few pitfalls to these otherwise very attractive loans. For example, if there is a prolonged slump not long after starting repayments of the loan, the lender may up the percentage each month in order to cover the loan and its interest.
Also, as per the Escrow account method of merchant loans, the lender will set up a new, joint bank account between themselves and the borrower. All card payments will then be remitted to this account and the necessary amount deducted for the lender with the remainder being for the borrowing business. A major disadvantage here is that there can be an increased delay between payments coming into the account and then actually reaching the business’ active account as it has to pass further stages before being ‘released’ to the borrower.
These loans are made for businesses and the application process will reflect this in almost all cases. Furthermore, unlike merchant loans, these loans can be obtained from traditional and high street lenders such as banks and traditional brokers making them a wide-scale option.
These work as many other loans do. The business requiring the loan will have to fill out a well-established application form which will likely require a number of business documentation such as annual turnover, expenses, profits and similar. Then, subject to further credit and business checks, the lender will make a lending decision; either an acceptance or a rejection of the application.
A major benefit of these traditionally structured loans is that upon acceptance the loan provided will be all inclusive and the amount needed to be repaid will be established from the outset allowing the borrowing business to start preparing for repayments. Furthermore, these loans will usually last longer than payday and other similar short term loan options, giving more time for repayments and loan management.
Pitfalls of Business Loans
With business loans, their nature is sometimes their downfall with borrowers. Because they need to be repaid in one go plus interest, the repayment amount can sometimes be quite substantial. For example, if a business borrows £50,000 then needs to repay £55,000 – £60,000 once interest in accounted for, they will need to have that money available in its entirety as soon as the loan term finishes. If they don’t they may face strict penalties and extra fees and charges.
Additionally, business loans tend to be amounts well in excess of £10,000and many businesses may not actually have the reserves to repay a lump sum. Whereas merchant loans allow a business to effectively repay at its own pace, business loans offer far less flexibility and whilst they certainly do serve an important need, they can be limiting for many businesses.