If you are a business owner in the UK, and you need to borrow money, then there are a number of different types of business loans available. Here, we look at some of the options open to you.
Out of all the types of business loans, this is possibly the simplest form of loan. With an unsecured loan, you borrow a sum of money, then repay the amount borrowed plus interest in monthly or quarterly installments over the course of the loan term.
Secured loan / commercial mortgage
A secured loan works in a similar way to an unsecured loan, in that you repay the capital and interest in monthly installments. The principal difference is that the loan is secured on a business asset – often land, commercial property, or another property owned by the business owner. If you then fail to maintain repayments, the lender has the right to take possession of the security.
A merchant cash advance is an innovative new form of borrowing that is especially suitable for any business whose customers regularly pay via debit or credit card.
Instead of making regular monthly repayments, as you might with an unsecured or secured loan, you repay the loan amount, plus an additional percentage, every time a customer pays via debit or credit card. The lender might take 20% of each transaction value as a contribution towards repaying the advance, leaving you to retain the rest.
Invoice finance is designed to provide a solution for businesses that might struggle to get their business customers to settle their invoices promptly, leading to potential cash flow difficulties.
Instead, when you enter into an invoice finance arrangement, the finance provider will send you an immediate payment every time you issue an invoice. The amount of this payment will be a significant proportion of the invoice’s value, perhaps 75–80%. Then, when your customer finally pays the invoice, the remaining portion of the transaction value is paid to you, less a small percentage that is retained by the lender as their fee.
Invoice finance comes in two principal forms: invoice discounting and factoring. With the latter, the finance company will assume responsibility for collecting payment for each invoice on your behalf.
Hire purchase provides a potential solution when you want to purchase a business asset but are unable to afford it. Instead, a lender purchases the asset on your behalf and ‘hires’ it to you, so that you can start using the asset in much the same way as if you were the owner.
Firstly, you make a deposit payment, typically around 10% of the asset’s value. You then make regular repayments over the term of the agreement to cover the purchase price, plus interest. The agreement might require you to make a larger final payment, known as a ‘balloon payment’.
As the name suggests, this form of borrowing starts with a period when you rent or hire the asset, and then you become the legal owner of the asset at the end of the term when all repayments have been made.
Hire purchase is a method by which a business purchases a new asset, whereas asset re-finance involves raising money against an asset you already own.
The lender becomes the legal owner of the asset at the start of the agreement, but you will still have exclusive use of the asset and can continue to use it in the same way as before.
You then make regular repayments to cover the amount borrowed plus interest. Once you have made the final repayment, you become the legal owner of the asset once again.
For most of the loans we have looked at so far, you will usually be free to use the funds borrowed for any business purpose. However, development finance is specifically designed to provide funds to either develop or refurbish a property.
With development finance, you might be able to borrow around 70% of the estimated market value of the property once the development project has been completed.
Unlike many other forms of borrowing, with development finance, the full amount borrowed is not usually advanced to you in one go. Instead, the lender will make a series of payments as the development project progresses. It may want to see a surveyor’s report to satisfy itself that the project is progressing as scheduled before each tranche is made available.
Development finance is usually provided on an interest-only basis. Normally, you don’t need to make regular repayments, with the original loan amount and all of the interest repaid in one lump sum at the end of the term. To repay this amount, you might either sell the completed property or refinance to another arrangement, such as a commercial mortgage.
If you want to find out what types of business loans fit your business better, get in touch with the team at Funding Bay!
