How To Choose The Right Type Of Business Loan
Almost every business is likely to require external finance from time to time. The British Business Bank reports the most common reason UK SMEs do so is to boost working capital or cashflow. Alternatively, you could want to prompt growth by investing in new equipment, facilities or staff. Or perhaps you need to fund a management buy-out?
Whatever your needs, it’s easy to feel overwhelmed by your options. There are high street banks plus a wealth of alternative online lenders to choose from. Such online lenders offer a wide spectrum of loans and if you need to cover some operating expenses, you can definitely apply for a quick and easy payday loan. Then there’s the finance products themselves – each with different funding limits and repayment terms.
Read up on the common types of business loans below to guide your application.
Standard business term loans work in the same way as personal loans in that you borrow money and pay it back in installments, plus interest, over an agreed period of time. This could be short-term – up to one year – or spread over several years.
Term loans can either be secured or unsecured. This means you either provide assets such as property as security for the lender in case you can’t make the repayments, or you don’t. Secured loans typically come with higher funding limits and better interest rates as there’s less risk involved for the lender this way.
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Business cash advance
Cash advances from alternative providers such as Nucleus are an increasingly popular option thanks largely to their flexibility.
You’ll still borrow an amount of money upfront, but repayments are taken as a percentage of your future monthly revenue instead. You’ll pay back more when business is booming and less in quieter months. It’s an ideal solution if your business is seasonal – and while the time it takes to pay back is variable, the total cost remains the same.
Asset or invoice financing
Asset-based lending offers a means of raising funds against the assets on your balance sheet, including property, stock, machinery, and invoices. Some lenders make it possible to use a combination of multiple assets to access a larger loan, while others prefer certain asset types.
If your credit history or past performance could restrict your access to traditional finance, this method puts the focus on your assets instead.
Equity finance involves selling shares of your business in exchange for funding. It’s a popular method for start-ups in particular, but as with most loan types, it’s not right for everyone. As well as their portion of shares your investors may want to have on say on how your business is run, so you’ll want to partner with people you can trust.
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Do any of these types jump out as the right option for your business? Carry out further research and shop around to find the best funding solution.