Q&A - What is a bank loan?

A bank loan is the most common form of loan capital for a business.

A bank loan provides medium or long-term finance.  The bank sets the fixed period over which the loan is provided (e.g. 3, 5 or 10 years), the rate of interest and the timing and amount of repayments. 

The bank will usually require that the business provides some security (“collateral) for the loan, although in the case of a start-up this security often comes in the form of personal guarantees provided by the entrepreneur.

Bank loans are good for financing investment in fixed assets (such as plant & machinery, land and buildings).  They are generally charged at a lower rate of interest that a bank overdraft.  The interest rate can be either fixed (e.g. 8% per year on the amount outstanding) or variable (where the interest rate varies depending on the Bank of England base rate).

However, a bank loan provides less flexibility than a bank overdraft. The business commits to meeting the bank loan repayments and interest – which it needs to do whether or not the cash flow position is good. A failure to meet the terms of the bank loan may lead to the bank putting the business into insolvency.

Bank loans tend not to be offered to start-ups or businesses with a track record of poor profitability and cash flow.  Such businesses are perceived as being high-risk by banks that, as a result of the credit crunch, are more cautious about the kind of lending they offer.

BUSS4 - a clash of culture and a failed takeover [24 May 2012]
Revision Presentation - Improving Cash Flow [17 May 2012]
Revision Presentation - Measuring and Increasing Profit [17 May 2012]
Revision Presentation - Calculating and Measuring Profit [13 May 2012]
Revision Presentation - the Startup Cash Flow Forecast [13 May 2012]
Revision Quiz - Sources of Finance for a Startup [12 May 2012]
Revision Quiz - Cash Flow Forecasting for a Startup [12 May 2012]
Takeovers and Mergers - the failed takeover behind Clinton Cards’ Collapse [9 May 2012]
Enterprise, Location and Culture - Inside the new Google Campus in London [14 Apr 2012]
Revision Presentation - Managing Risk [7 Apr 2012]
Revision Presentation - Business & Interest Rates [7 Apr 2012]
UK manufacturing - GlaxoSmithKline invests in 1,000 new jobs [22 Mar 2012]
Simple solutions to everyday problems - Spanx [11 Mar 2012]
Start-ups - the Wooden Smartphone? [4 Mar 2012]
Lesson video : Franchising for beginners [4 Mar 2012]
Buying-in to the Facebook culture [5 Feb 2012]
Investment in People - Google and Human Capital [26 Dec 2011]
Characteristics of an entrepreneur - Fil Adams-Mercer [13 Dec 2011]
The Rise and Fall and Rise of Gerald Ratner [27 Nov 2011]
International operations decisions - Adidas trainers for $1? [26 Nov 2011]
Cut price cup cake deal goes wrong…... [22 Nov 2011]
How we made our millions: Michelle Mone and Richard Reed under the spotlight [10 Nov 2011]
Unilever hit by rising costs [6 Nov 2011]
Banana Smoothies & Interest Rates [5 Nov 2011]
Lets Teach Kids to be Entrepreneurs [3 Nov 2011]
How PepsiCo are trying to control diseconomies of scale [18 Oct 2011]
Revision Quiz - Startups and Understanding the Market [16 Oct 2011]
Revision Quiz - Market Research for a Business Startup [13 Oct 2011]
Revision Quiz - Locating the Startup Business [12 Oct 2011]
Applying for a Franchise [6 Oct 2011]
Profits dive and put pressure on liquidity - the Distress Monitor [29 Sep 2011]
Revision Presentation - Risks and Rewards to Enterprise [7 Sep 2011]
Revision Presentation - Adding Value [7 Sep 2011]
Revision Presentation - Objectives of New Businesses [6 Sep 2011]
Revision Presentation - Enterprise Skills [6 Sep 2011]
The puzzle of rising profits [5 Sep 2011]
Insights from an Entrepreneur - Lara Morgan (Pacific Direct) [5 Sep 2011]
Tesco pulls out of Japan [4 Sep 2011]
Risk-free Curry? Searching for the Right Growth Strategy [29 Aug 2011]
Luke Johnson on sources of finance for a startup [29 Aug 2011]
Debunking the myths of entrepreneurs and startups - a must read [28 Aug 2011]
Spotify - Five Years to Break-even [28 Aug 2011]
Entrepreneurs and Calculated Risks [25 Aug 2011]
Evaluation in business essays?  Its just like going on a date… [22 Aug 2011]
Tim Harford on why it its good for new businesses to fail [16 Jul 2011]
Samsung seeks a ban on Apple products [30 Jun 2011]
Business investment: the UK corporate cash pile [15 Jun 2011]
Changing demand in the market for live music [16 May 2011]
Jaguar goes for NPD investment with £5bn plan [10 May 2011]
HMV Strategy - Death of a Billion Downloads [24 Apr 2011]
Life in the chocolate factory - automation, productivity, motivation and culture [24 Apr 2011]
The UK Economy - Business Investment [14 Mar 2011]
Partners in profit - the JLP way [10 Mar 2011]
Stuff the banks - John Lewis issues a retail bond [6 Mar 2011]
Introducing a new kind of business organisation - the benefit corporation [17 Feb 2011]
CSR - What is “Creating Shared Value”? [16 Feb 2011]
Michael Porter - Shared Value and the Limitations of CSR [15 Feb 2011]
Sources of finance - the attraction of franchises [8 Feb 2011]
CSR - The Classic Milton Friedman Clip [5 Feb 2011]
The Year of Corporate Philanthropy [31 Jan 2011]
Insights from an Entrepreneur - Kirsty Henshaw (Worthenshaws) [8 Jan 2011]
Q&A - What is “profit quality”? [7 Jan 2011]
From crisps to vodka - a profile of a down-to-earth entrepreneur [7 Jan 2011]
Introducing the “austerity” entrepreneurs [4 Jan 2011]
Bangers for Cash - Giveacar and Social Enterprise [4 Jan 2011]
Celebrating the Everyday Entrepreneurs [29 Dec 2010]
BUSS1 Revision Quiz - Sources of Finance for a Startup [13 Dec 2010]
Dominos Pizza - Growth & Strategy (Part 3) - Smart Marketing [26 Nov 2010]
Dominos Pizza - Growth & Strategy (Part 2) - Innovation, Service and Smart Operations [26 Nov 2010]
Dominos Pizza - Growth & Strategy (Part 1) - Driving Competitive Advantage [26 Nov 2010]
Cash flow Clue-doh! The Mystery is Revealed… [2 Nov 2010]
Start-ups - a surge in new businesses post recession [2 Nov 2010]
Revision Games - Sources of Finance Definitions [1 Nov 2010]
Profits up at Amazon - but so are costs [22 Oct 2010]
Hilary Devey - Profile of an Inspirational Entrepreneur [22 Oct 2010]
Bonus system to encourage safety improvements at BP [20 Oct 2010]
Businesses argue the case for greater investment in public infrastructure [16 Oct 2010]
Google, Profits and Diversification [16 Oct 2010]
How to start a toy shop [12 Oct 2010]
Insights from an Entrepreneur - Laura Tenison (JoJo Maman Bebe) [11 Oct 2010]
Insights from an Entrepreneur - Fraser Doherty (SuperJam) [10 Oct 2010]
Insights from an Entrepreneur - Will King (CEO King of Shaves) [10 Oct 2010]
Culture & Change - The Challenge Facing Nokia [27 Sep 2010]
Business structure in the UK - the rise of micro companies [21 Sep 2010]
Sources of finance - bank loans down by £28 billion [15 Sep 2010]
Why we should encourage our students to start a business at university [1 Sep 2010]
Lesson Worksheet - Adding Value [10 Aug 2010]
Cashflow-Cluedoh! [10 Aug 2010]
Lesson Worksheet - Enterprise & Entrepreneurs [9 Aug 2010]
Lesson Worksheet - Gross Profit Basics [5 Aug 2010]
Essential business reading for the summer! [5 Aug 2010]
Lesson Worksheet - Financing Business Growth [16 Jul 2010]
Entrepreneurs LIVE! 2010 - THE Enterprise Event for Students in 2010 [1 Jul 2010]
New BBC Resource: Start Up Stories [25 Jun 2010]
BUSS4 data - what happened to business investment in the UK recession? [14 Jun 2010]
Is the mega-merger falling out of fashion? [7 Jun 2010]
BUSS4 - Recession Strategy Lessons from Four Female Entrepreneurs [6 Jun 2010]
Rajeeb Dey to Speak at the 2010 Business Teacher National Conference [3 Jun 2010]
British vodka beats the world! [19 May 2010]
Airlines founder plans a shareholder revolt [16 May 2010]

BUSINESS TEACHER RESOURCE NEWSLETTER
Get first news of business teaching resources, ideas and other materials from tutor2u. Over 9,400 business teachers from the UK and around the world receive our regular teacher email newsletters. Sign up for free here!