Loans

A loan is a lump sum of money from a bank or other financial provider. The enterprise receives the full amount up front, then repays it in instalments over a set period. Each instalment pays back part of the amount borrowed plus interest, which is the lender's charge for providing the money.

For example, a mobile bike repair enterprise borrows £7,000 to buy a van and tools. The lender sets a three-year term, so the owner makes one payment each month rather than repaying the whole £7,000 in one go.

Advantages

• Fixed interest rate: the rate may be fixed for the whole term. The repayments then stay the same each month, so the enterprise can plan ahead without worrying that payments will rise.
• Known repayment amount: because the instalments are set out in advance, the owner knows exactly what must be paid and when. This makes budgeting easier, as the loan payment can be treated as a regular cost.

Disadvantages

• High interest: interest rates may be high, so the enterprise may pay back considerably more than it borrowed. The extra cost reduces the money available for other things.
• Security: the lender may require security — an asset such as property or equipment. If repayments are not made, the lender can take ownership of that asset and sell it to recover the money owed.

A loan from a financial provider is not a gift: it must be repaid, and the interest charged means it costs more than the amount borrowed. This is true even if the enterprise does less well than expected. The lender is still entitled to its instalments, so a loan adds a regular commitment that continues even if sales are lower than planned.