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Understanding business loans and commercial finance

Before borrowing, identify how much funding is needed, what it will be used for and how repayments would be met if sales slow or customers pay late. Short-term cash-flow needs and long-term asset purchases may call for different finance structures.

Common business funding needs

• Working capital finance: funding stock, operating expenses or gaps between paying suppliers and receiving customer payments.

• Plant and equipment finance: purchasing machinery, vehicles or other business assets, with leasing as an alternative to buying.

• New business start-up funding: covering establishment costs while allowing for uncertain early revenue.

• Buying a business or franchise: considering the purchase price alongside working capital and ongoing operating commitments.

• Commercial property finance: funding business premises while accounting for purchase costs and ongoing property expenses.

• Refinancing business debt: weighing any change in repayments against fees, the new loan term and total borrowing costs.

Venture capital is different from a business loan: it generally involves investment in exchange for an ownership stake rather than scheduled loan repayments. Consider the effect on ownership and control when weighing equity funding against debt.

Comparing business loan costs and features

When comparing small business loans or commercial loans, look beyond the advertised interest rate. Compare the same borrowing amount and term, and check how each lender calculates interest and fees.

• Total cost: include establishment fees, ongoing charges, interest and any early repayment or exit costs.

• Repayment schedule: check whether payments are daily, weekly or monthly and how this aligns with customer receipts and seasonal income.

• Loan term: a longer term may reduce each repayment but increase the total interest paid.

• Rate and flexibility: understand whether the rate is fixed or variable, whether extra repayments are permitted and whether a final balloon payment applies.

• Security and guarantees: secured borrowing can put pledged assets at risk if repayments are not met. Unsecured business loans may still require personal guarantees, creating personal liability for the guarantor.

Business loan requirements and cash-flow planning

Lender requirements vary by product and business circumstances. Relevant information may include trading history, turnover, existing debts, credit history, bank statements and financial accounts. Start-up businesses may need a business plan and cash-flow forecasts because they have limited trading records.

Build a repayment budget that leaves room for tax, wages, supplier bills and unexpected expenses. Test the effect of lower revenue, delayed payments and, for variable-rate borrowing, higher interest rates. If repayments would leave little room for these pressures, consider reducing the borrowing amount, staging the purchase or exploring alternatives to debt.

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Please note that some of our calculators may use assumptions that are not necessarily applicable to your current specific circumstances and we therefore cannot always guarantee their accuracy.

We recommend that you seek professional financial advice from a licensed professional before proceeding with a loan.

Loan Repayment and Finance Modeling Calculators