Loans are a common way of raising finance for your business, allowing you to increase working capital in exchange for manageable repayments over time.
The funding given is compatible with a myriad of objectives, including cash flow management, expansion or covering new project costs.
There is also a broad range of solutions on the market, coming from various sources, allowing almost every business to find a loan that suits them.
This guide lists the different types of loans available to help you uncover the right one for your business.
- Secured loans
- Unsecured loans
- Short-term loans
- Long-term loans
- Microloans
- Commercial mortgages
- Invoice finance
- Revolving lines of credit (inc. overdrafts)
- Merchant cash advances
Secured loans
Most lenders will consider the risk before deciding whether to offer a business finance and how much to lend.
Secured loans mitigate the risk posed to the lender by using your assets against the loan. If you default on payments, the lender will repossess your assets to clear the balance. Most traditional lenders, including banks, will ask for security.
There are many benefits to a secured loan. The reduced risk usually means you receive more competitive interest rates, higher sums and better terms. It will also make you more likely to be accepted, especially if the lender sees you as risky.
However, it relies on your assets to utilise as security, which won’t be an option for every business.
Unsecured loans
The alternative to a secured loan is unsecured. With an unsecured loan, you do not have to use collateral, so it’s ideal for companies that don’t have higher valued assets, such as plant and machinery or property.
Unsecured loans are common, especially from alternative lenders. However, they pose more risk to the lender, so expect higher interest rates and lower amounts depending on your risk profile. You will also have to meet other criteria to ensure the lender is willing to take on the risk.
Quite often, directors may have to sign a personal guarantee that states you will cover the cost if your company defaults. These threaten your personal finances, which is why it is recommended to obtain insurance.
Short-term loans
A short-term loan typically lasts between three months and five years. It is ideal if you have only a small funding gap you need to fulfil (though you can still raise anywhere between £1,000 and £1 million, depending on your risk profile).
Most short-term loans offer a quick release of capital, which is helpful if you urgently need funding. However, there are often higher interest rates, plus your repayment amounts will be higher to allow you to clear the loan in the set timeframe.
Before considering a short-term loan, remember to check how much funding you require and whether you will afford the regular repayments.
Long-term loans
Long-term loans last between five and 30 years. They offer a long-lasting capital injection for your business, enabling you to fill significant gaps.
There are many benefits to a long-term loan. Repayments are spread over a longer timeframe, meaning instalments are likely to be more affordable each month. They also tend to have lower interest rates.
They tend to be available to larger businesses, there is a long-term commitment you must be prepared to accept. Once again, it is crucial to review your affordability to check if it is a fit for your business.
Microloans
Microloans are a type of alternative loan, offering small amounts of funding (typically less than £15,000). The repayment timeframe may not exceed one year.
Microloans are suitable for SMEs with poor credit scores or a lack of collateral. The smaller amount means the risk to the lender is reduced, and there is less pressure on the cash flow for the borrower.
A microloan is a potential solution if you have a small funding gap or your financial status has locked you out of other options.
Commercial mortgages
A commercial mortgage allows you to raise finance towards the purchase, development of property or to release equity already in your property. It is relevant if you wish to own premises, including retail space, restaurants, offices, warehouses, etc., to operate from.
If you seek a commercial mortgage, remember that you will still need a deposit – typically 25% of the overall value or more.
Mortgages tend to be priced competitively. However, they are also a long-term commitment (a mortgage may last up to 30 years) and often have associated fees.
They are also only available for specific funding purposes, unlike other loans. However, they are valuable if you are looking to fund the purchase of premises.
Invoice finance
Invoice finance could be an option if you send B2B invoices. It uses your unpaid customer invoices as collateral to release funding. You receive the money upfront (up to 90% of the value of the invoice) and the lender is repaid when the customer pays the invoice. Credit is usually extended to the business for 30-120 days after the invoice or month end.
Invoice finance is commonly used to ease the cash flow burdens of late customer payments. It is ideal for freeing up capital which may be used to improve your cashflow, invest in your company or enable acquisitions.
Lines of credit (inc. overdrafts)
A line of credit is similar to a credit card, giving you access to a set amount of funds. You withdraw the funds when needed and pay interest on the amount you have used. It includes bank account overdrafts.
If you have a revolving arrangement, you can reuse the credit once you have repaid it.
Lines of credit help give you capital to access when needed, including covering temporary gaps. However, it isn’t suitable for significant funding gaps or as a long-term measure.
It’s also worth noting a lender will ask for documentation, such as bank statements or balance sheets, before allowing you to access a line of credit.
Merchant cash advances
A merchant cash advance allows a lender to provide you with an upfront sum that you repay using proceeds from debit and credit card sales.
Small businesses that need quick funds to cover short-term gaps often use merchant cash advances. Like other loans, they come with associated costs in terms of interest and fees.
If you are using one, you should carefully consider if it is a good option for your business and only use it as a temporary measure. A more cost-effective solution might be to convert it to a standard loan.
In summary
If you have a funding need in your company, there are a myriad of loans available.
Today, more types of loans are available than ever before. This means there’s a solution for a vast array of business needs.
Before considering a loan, it’s crucial to determine what you will use it for, what you can afford and your eligibility criteria. Doing so will enable you to find the perfect fit.
We support you in finding a loan that works for your needs using our extensive funding knowledge and network of lenders.