A loan is credit, usually in the form of cash, that you borrow and repay over an agreed length of time.

Banks, other businesses and even friends and family can provide businesses with loans

As well as repaying the amount you’ve borrowed, you normally have to pay interest on a loan.

The amount will depend on:

• how long you need the loan for
• how much you borrow
• whether the loan is ‘secured’ – e.g. if you own your home and agree to transfer ownership to the loan provider if you don’t keep up your payments
• other factors, like the Bank of England base rate

The interest rate may be:

• fixed, so it won’t change for the length of the loan
• variable, so it will change with the Bank of England base rate or the bank’s cost of borrowing

Reasons for getting a loan

Loans are generally suitable for:

• paying for assets – e.g. vehicles or computers
• start-up capital
• instances where the amount of money you need won’t change

It’s not a good idea to take out a loan for on going expenses – you might find it difficult to keep up repayments.

Advantages

Advantages include:

• unlike overdrafts, loans are not repayable on demand – this means that you’re guaranteed the money for the whole term (generally 3 to 10 years)
• loans can be tied to the lifetime of equipment or other assets you’re borrowing the money to pay for
• you won’t have to give the lender a percentage of your profits or a share in your company

Disadvantages

Disadvantages include:

• loans aren’t very flexible – e.g. you may have to pay charges if you repay early
• you might struggle to meet monthly payments if your customers don’t pay you
• if your loan is secured against your personal property or assets (eg your home) you could lose them if you don’t keep up the payments
• the cost of repayments for variable rate loans can change, making it harder to plan your finances

Contains public sector information licenced under the Open Government Licence v2.0.