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Bank loans are frequently used to finance start-up capital and also for larger, long-term purchases.

Bank loans are normally provided at a cost, which is generally interest on the owed amount. Other fees and charges may be applicable, depending on the type of loan and on the lender.

Arrangement fees are commitment or administration charges payable to the lender to reserve the funds and to cover opening costs. Fees will vary depending on the complexity of the business, its size and risk.

Costes

-arrangement fees

-interest

-insurance

-covenant compliance costs

-professional advice

Interest is charged and will vary depending on risk of default. The most common types of interest rate will be fixed or variable (a margin over base rate or London Interbank Offered Rate [LIBOR]).

Advantages

1- suitable for medium- and long-term borrowing needs

2- the loan amount, length of term, repayment schedules and type of interest rate can be tailored to suit the business, including both cashflow and income generation

3- repayment holidays may be available

4- funding is not dependent on giving up a share of the business

5- this type of borrowing usually has a lower rate of interest than more flexible (ie short-term) options

Disadvantages

1- not as flexible as short-term solutions. For example, if the loan is repaid early, additional fees may be applicable

2- the lender may not grant the entire amount requested, as the business’s financial situation will be taken into consideration

3- as with other types of debt, if the loan is secured and the business fails to repay, the lender may take action to seize the security provided for the loan

4- not ideal for cases where it is difficult to assess the amount of funding needed

5- time will need to be spent preparing management accounts and monitoring compliance with covenants