When choosing the right business loan, you need to ask four questions: what are you funding, what assets can be used as security, how predictable is your revenue, and how soon do you need the money? Usually, a once-off purchase of equipment requires hire purchase or asset finance, buying premises requires a commercial mortgage, accessing money tied up in invoices requires invoice finance, and a general working capital need requires an unsecured or secured loan. Card-heavy businesses have an additional option in the merchant cash advance.
The rest of this guide walks through each of these products in more detail, how they work, who they suit, and what they cost, so you can match your situation to the right type of finance with confidence.
Types of business loans
Business loans broadly fall into two camps: those that give you a lump sum to repay over time, and those that release funds against something you already own or are owed. Within those camps, the most common products are unsecured loans, secured loans, hire purchase, and asset refinance.
Unsecured loans
An unsecured business loan is the most straightforward form of business borrowing. The lender advances a sum, anything from a few thousand to several million pounds, and you repay it, plus interest, in regular monthly or quarterly instalments over an agreed term.
Because there is no asset backing the loan, lenders rely heavily on your trading history, credit profile, and (very often) a personal guarantee from the directors. Terms typically run from 12 months up to around 5 to 7 years, and interest rates vary widely depending on your business’s strength and the wider rate environment.
Unsecured business loans suit businesses that want speed and simplicity, and that don’t want to tie a specific asset to the borrowing.
Secured loans and commercial mortgages
The same way an unsecured business loan works, you pay back a secured business loan with interest in instalments, but the loan is secured against a property or asset. If you cannot make repayments, the lender may take possession of the property or asset.
Thanks to the security, secured business loans often have lower interest rates, longer repayment terms, and access to larger amounts.
A commercial mortgage is the most familiar version of this, used to buy business premises in much the same way a residential mortgage is used to buy a home.
Hire purchase
Hire purchase is designed specifically for buying business assets, vehicles, machinery, equipment, and so on. Rather than lending you cash, the provider buys the asset on your behalf and leases it to you over an agreed term.
You usually put down a deposit (often around 10% of the asset’s value) and then make regular payments covering the purchase price plus interest. Some agreements end with a larger final “balloon” payment. Once the final payment is made, ownership transfers to you.
Terms typically run up to around six years. Hire purchase suits businesses that want to spread the cost of an essential asset while ultimately owning it outright.
Asset refinance
Asset refinance works in the opposite direction to hire purchase: instead of helping you acquire a new asset, it releases cash from one you already own.
The lender advances funds based on the value of the asset, and ownership is temporarily transferred to them. You continue to use the asset as normal, repay the loan plus interest in instalments over a term of typically two to seven years, and regain full ownership at the end.
It’s a useful option if you have valuable plant, vehicles, or equipment sitting on your balance sheet and you want to convert some of that value into working capital without selling anything.
Business loans for specific needs
Beyond the general-purpose loans above, several products are designed around a specific cash flow situation rather than a flat lump sum. These can be a much better fit if your funding need is tied to sales activity or unpaid invoices.
Merchant cash advance
A merchant cash advance is built for businesses that take a high volume of card payments, such as retailers, hospitality venues, and similar. You can typically access up to around £150,000.
Instead of fixed monthly repayments, the provider takes an agreed percentage of each card transaction (often somewhere between 5% and 20% of daily card takings) until the advance is repaid. When sales are strong, you repay faster; when they’re quieter, repayments slow down too.
Rather than charging interest, these advances use a “factor rate.” A factor rate of 1.3, for example, means you’ll repay 130% of the amount borrowed in total. This is convenient and flexible, but it’s worth converting the cost into an effective annual rate before you commit; the headline factor rate can disguise a relatively high cost of capital.
Invoice finance
Invoice finance turns unpaid invoices into immediate working capital. Each time you raise an invoice with a business customer, the provider advances a proportion of its value, commonly 85-90%, within a day or two.
When your customer eventually settles, you receive the remaining balance, minus a fee that typically works out at a small percentage of the invoice value. The two main variants are invoice discounting, where you continue to manage collections yourself and your customers needn’t know a finance provider is involved, and factoring, where the provider also handles credit control.
Invoice finance is a strong fit for businesses with long payment terms or growing sales ledgers, where the gap between issuing invoices and being paid creates real cash flow pressure.
Business loan costs and repayments
Across all of these products, you’ll always repay more than you borrow, but the way the cost is structured varies considerably, and that affects how easy different products are to compare.
The main cost mechanisms are:
Interest rates. Used for unsecured loans, secured loans, hire purchase, and asset refinance. Rates depend on your business’s credit profile, the loan size and term, whether the loan is secured, and the prevailing base rate. Secured borrowing is almost always cheaper than unsecured, and longer terms generally mean lower monthly repayments but more interest paid overall.
Factor rates. Used for merchant cash advances. The total repayment is fixed up front (loan amount × factor rate), but because repayments are taken from daily card sales, the effective annual cost can be high, particularly if you repay quickly.
Per-invoice fees. Used for invoice finance. You pay a small percentage of each invoice’s value, plus, in many cases, a service or facility fee. This makes invoice finance feel less like traditional borrowing and more like an ongoing cash flow service.
It’s important, when comparing options, to look past the headline rate and total cost of the loan. This includes arrangement fees, early repayment charges, and personal guarantee requirements. A loan that looks more expensive on paper can sometimes work out cheaper, or simply less risky, once you account for term length and flexibility.
Choosing the right business loan
The best loan for your business depends on what you’re funding, what assets you have available, how predictable your revenue is, and how quickly you need the money. A retailer with strong card sales may be best served by a merchant cash advance; a manufacturer buying a new machine will probably get better value from hire purchase; a growing B2B services business with slow-paying clients may benefit most from invoice finance.
Working with a commercial finance specialist can save a great deal of time and often money, by matching your situation to the right product and the right lender from the outset. Funding Bay specialises in exactly this. Get in touch with the team, or try our business loan calculator, to find the option that fits your business best.
