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While an overdraft should be used to finance short term cash needs, a bank loan should be used to finance longer term business needs.These needs could include the need to move premises, the development of new markets or the purchase of fixed assets such as machinery and vehicles (also see Asset Finance).
If the bank are happy to support the business they will agree a loan of a certain amount to be repaid over an agreed period eg; 3 years with the business making regular monthly repayments.
There are a number of small variations on the bank loan facility with the option to have a fixed or variable interest rate for example.
The bank may want to see a business plan to support the application and may require security from the business or the directors depending on the amount of the loan.
Sometimes the loan will also take the form of a commercial mortgage, where the business will borrow funds to purchase commercial premises. Unlikle a domestic mortgage, the bank will only lend a maximum of around 75% of the total value of the premises.
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