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Whether you plan to expand, buy equipment or are looking at organising your business finances, business loans could be the answer.

There are many reasons why your business may need to borrow some money. You could be:

  • Looking to buy stock
  • Thinking of employing people
  • Moving premises
  • Paying debts…

The list is endless. No matter what you need a loan for, you should be aware that interest rates are still higher than at any time in 15 years the moment.

But that doesn’t mean you should turn your back on a loan! You just need to be aware that costs are higher than a few years ago.

And remember, that loans aren’t the only way to access funds. We’ve looked before at other types of financing for your business.

What is a business loan?

Business loans are designed specifically for commercial purposes. While you could use a personal loan for your needs, you can borrow larger amounts with a business loan. You can also build a credit score for your business – which makes receiving funding later more easy – and there are often different financing options available, including peer-to-peer and unsecured business loans.

What types of business loans are there?

There are a range of business loans available, which we will explore.

Traditional bank loans

They are the most common way for businesses to take a loan. According to official figures, UK SMEs borrowed £65.1 million from banks.

Traditional bank loans are offered by high street banks and include a detailed application process. The advantage of these loans is that they include competitive interest rates, flexible repayment terms and you will be building a relationship with the bank should you require future funding.

Short-term loans

These are popular loans for businesses that require immediate funds to bridge temporary cash flow gaps or any operational expenses. They usually have a repayment period of up to 24 months and allow quick access to capital. Interest rates may vary and will be based on the business’s credit score and the lender. They can be higher than long-term loans.

Unsecured loans

Businesses that are offered unsecured loans do not need to find collateral. This makes them a useful option for companies without valuable assets. They are usually a faster way to secure loans and offer flexibility in how the funds or used. But you will be paying higher interest rates and the amount you can borrow is usually more limited than secured loans.

Secured loans

Secured loans are backed by collateral, such as equipment, inventory or property owned by the business. This means you can access larger loans and possibly better interest rates. But if you fail to meet your repayments, then those assets could be at risk. It’s just like losing your home if you fail to pay your mortgage! Secured loans usually offer longer repayment terms, but that can mean you’ll pay more in interest in the long run!

Asset finance

Asset finance helps businesses acquire assets, such as vehicles and equipment, without paying the full price upfront. There are many options available including:

  • Finance leases
  • Hire purchase
  • Operating leases

This means you can spread the cost of acquiring necessary assets – and that helps manage cash flow. It can be useful but remember, the cost of acquiring the asset is higher than if bought outright. And you don’t own the asset until it’s paid in full.

Merchant cash advance

Businesses with a large amount of card transactions – such as retail or hospitality – can access merchant cash advances. This means a lump sum payment is made based on a percentage of your business’s future credit or debit card sales.

It’s quick and simple to apply for this kind of loan and it offers flexibility during slower business periods as there are no fixed monthly payments.

But it can attract higher fees and interest rates compared to traditional loans. And businesses with low or inconsistent card sales may find this an unsuitable way to borrow.

Invoice financing

Also known as accounts receivable financing, invoice financing helps bridge the gap between when an invoice is raised and when it’s paid. A lender will pay an advance (usually up to 90%) of the outstanding invoice value and collect the payment directly from the customer. Once the invoice is fully paid, the lender releases the remaining amount, minus any fees.

While this provides a solution to cash flow problems, fees and interest rates can be higher than traditional loans. Also, your lender becomes involved in collecting payment from your customer or client, which may impact your relationship with them.

What to do next?

If you need help understanding what’s best for your business, then contact our team today.