What should you look for when choosing a business loan?

The finance you choose can affect your monthly cash flow, the total cost of borrowing and how much flexibility you have as your business changes.

That is why it pays to look beyond the headline interest rate or how quickly you can get a decision.

The right business loan should fit what you are trying to achieve, what your business can afford and how you expect your cash flow to work.

Here are the key things to consider when comparing business finance.

When you need funding, getting a quick decision can be tempting.

Some forms of finance can be arranged quickly, which can be useful when a business has an immediate need. But speed should be just one part of your decision.

Ask yourself:

How quickly can I get the money?

But also ask:

Will this finance still work for my business six months or a year from now?

A loan with fast approval is not necessarily the right loan for your business. The repayment amount, term, total cost and conditions can all have a much greater impact on your finances over time.

The interest rate is important, but it is not the only cost to consider.

Before agreeing to finance, make sure you understand:

• The interest rate
• Arrangement or setup fees
• Any other charges
• The repayment frequency
• The repayment term
• The total amount you will repay
• Any charges for repaying the finance early

The British Business Bank recommends understanding how much interest you will pay over the lifetime of a loan, rather than looking only at the initial amount you receive.

For example, borrowing £20,000 does not mean the cost of the finance is £20,000. You also need to understand the interest and any agreed fees that will be added to the cost of borrowing.

The cheapest-looking loan is not always the cheapest loan overall.

The length of the loan can make a significant difference to your monthly repayments.

A longer repayment term can spread the cost of borrowing over more time, potentially reducing the amount you need to repay each month.

That could give your business more room to manage its day-to-day costs.

But there is another side to consider.

A longer term can mean paying interest for longer, which may increase the total amount you repay.

So when comparing business loans, look at both:

What will I repay each month?

and:

How much will I repay in total?

The right balance will depend on your business, your cash flow and what you are using the finance for.

A loan might look affordable on paper but still put unnecessary pressure on your business if the repayment structure does not fit your cash flow.

Cash flow is the money moving into and out of your business. If more money is leaving than coming in at a particular point, you can experience a cash-flow squeeze even if the business is profitable overall.

A cash flow forecast can help you anticipate periods when money might be tight and understand whether you are likely to have enough available to meet your commitments.

Before taking out a loan, consider:

• When will your customers pay you?
• When do you need to pay suppliers?
• Are your sales seasonal?
• What regular operating costs do you have?
• Are you expecting any significant expenses?
• How much will remain available after your loan repayment?

The aim is not simply to find a loan you can technically repay.

It is to find finance that works alongside the way your business actually operates.

Different types of finance are designed for different circumstances.

You might need funding to:

• Buy equipment or machinery
• Purchase stock
• Cover working capital
• Invest in marketing
• Take on staff
• Refurbish or expand your premises
• Fund a new business opportunity
• Consolidate existing borrowing

Business finance can take many forms, including secured and unsecured loans, overdrafts, asset finance and other forms of funding.

The reason you need finance should therefore influence the type of finance you consider.

For example, using a short-term facility to fund a long-term investment could create unnecessary repayment pressure.

Before you start comparing lenders, be clear about what you are trying to achieve with the money.

Different lenders have different lending criteria.

A lender may look at your credit history, business financials, cash flow, profitability, trading history and other information when assessing an application.

If you have a strong trading history and straightforward funding requirement, you may have a wide range of options.

But not every business fits the same lending model.

You might have limited trading history, a poor credit history, limited assets or circumstances that require more explanation.

That does not automatically mean your business is not viable.

The British Business Bank explains that Community Development Finance Institutions, or CDFIs, can look beyond a weak balance sheet or poor credit history and consider the fundamentals of the business and the people behind it.

That relationship-led approach can be important if your circumstances do not fit a conventional lending profile.

Getting a loan is one thing.

Knowing who to speak to when you have questions about your finance is another.

Some businesses want a straightforward, largely digital lending experience. For others, having a relationship with a lender and being able to discuss their circumstances is important.

Think about what you want from your lender before you apply.

Do you want:

• A quick, straightforward application?
• A lender that understands your sector?
• Someone who will consider the wider circumstances of your business?
• Support when you are preparing your application?
• A relationship that continues beyond the initial lending decision?

There is no single right answer.

The important thing is to choose a finance provider whose approach matches what your business needs.

Your business today may look very different from your business in two or three years.

Before choosing finance, consider what flexibility you have if things change.

For example:

• Can you repay the borrowing early?
• Are there fees for doing so?
• What happens if your cash flow changes?
• Can the finance be refinanced in the future?
• Who can you speak to if you have concerns about your borrowing?

You should understand the terms before you sign the agreement, rather than finding out what happens when circumstances have already changed.

It can be tempting to look for the lender with the lowest rate, the fastest decision or the largest loan.

But business finance is rarely that simple.

The right option depends on your circumstances.

An online lender may suit a business that prioritises speed and has a straightforward funding requirement.

A high street bank may be appropriate for a business with an established trading history and a strong financial profile.

A specialist lender or CDFI may be worth considering if your business has circumstances that make mainstream lending more difficult.

The important thing is to compare the finance, not just the lender.

BEF is a not-for-profit Community Development Finance Institution.

That means our purpose is different from a commercial lender. CDFIs exist to provide finance and support to businesses that may not be fully served by mainstream finance.

We look at the business behind the application and consider its circumstances, plans and potential.

Our business loans can help established small and medium-sized businesses with the funding they need for activities such as investment, working capital and growth.

If you have been turned down by a bank, have limited assets or your circumstances do not fit a traditional lending model, BEF may be able to help.

It all starts with understanding your business and what you need the finance to achieve.

Before agreeing to finance, ask yourself:

• How much do I actually need to borrow?
• What will I use the money for?
• How much will I repay each month?
• How much will I repay in total?
• What interest will I pay?
• Are there any setup or other fees?
• How long will I be making repayments?
• Does the repayment structure fit my cash flow?
• Is the loan secured or unsecured?
• What happens if my circumstances change?
• Can I repay early and, if so, are there charges?
• How does the lender assess my application?
• What support will I receive during the application?
• Who can I speak to if I need help?

Taking the time to answer these questions can help you make a more informed decision about business finance.

The best business loan is not necessarily the one that gets the money into your account fastest.

It is the one that gives you the funding you need, with repayments and terms that make sense for your business.

If you're considering a business loan, BEF can help you explore your options.

We're a not-for-profit lender supporting small and medium-sized businesses across the North of England. If you need finance but your circumstances do not fit the traditional lending model, talk to us about what you are trying to achieve and the funding you need.

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