Business loans are a great way for providing businesses with a much-needed cash boost for growth, investment, innovation or training. However, they also come with many pitfalls. Failure to take into consideration the risks of taking out a loan may land a business in financial peril.

Considerations
Interest rates can vary greatly between 5% and 25%. A higher interest rate means that the business is taking on a much greater financial burden.

Repayment terms can either be a short period or several years. With many taking out loans to fund new start-ups, it is vital that there is a full understanding of the repayment terms agreed to.

A bank may reject an application for a loan if the risk according to the credit score is too high. Banks are required to explain their reasoning for a declined application and are legally obliged to refer you to an alternative lender.

Whether collateral is involved in taking out a loan should also be considered. The amount of collateral will vary depending on how big the risk of lending is and what industry your business is involved in.

Director Guarantee
For those who have decided against taking out a business loan or who do not meet the eligibility criteria, there are alternative methods of financing or providing a cash boost to their business.

A director guarantee, also known as a personal guarantee, is an undertaking to be responsible for the debt of the company should the business find itself in a situation where it cannot repay its debts. The director may secure the debt against their own assets, such as their home.

Click here for more information on a directors personal guarantee.

A business should never take on legal or financial obligations without seeking specialist independent legal advice.