Bank Loans

• The more risky the business is considered the higher the interest that will be charged by the bank.
• Bank loans can be a long- to medium-term source of finance, which can provide a large amount of capital. 
• • A loan helps to spread the costs of an asset over a longer period of time rather than paying for it in one go. This will help to improve a firm’s cash flow and liquidity. This is often why firms will use a loan even if they could use retained profit.
• What will a bank need to see from a business when applying for a loan?

  Business plan and financial forecasts
• They will also check the owner/firm’s credit and financial background. Security (collateral) such as property will need to be provided to secure the loan. This way the bank will be able to claim and sell this asset to cover the value of the loan.
• What are the main benefits of bank loans?

  • Greater certainty of funding, provided terms of loan complied with
  • Lower interest rate than a bank overdraft
  • Appropiate method of financing fixed assets
• What are the main drawbacks of bank loans?

  • Requires security (collateral)
  • Harder to arrange
  • Interest paid on full amounts
  • Startups and small businesses often excluded
• What is a mortgage?

  A very long-term loan (20-30 years) taken out on property. Often it has lower interest rates than other loans as it is secured against the property being bought and a deposit is required
• What is a debenture?

  Long-term loans with fixed interest rates which may not have a specific repayment date. Issued by firms to raise capital from private investors and act as  a form of IOU.