Availability of funding for small businesses
The number of alternative finance providers has risen significantly in recent decades. Presenting greater choice for businesses who might otherwise struggle to raise finance.
Finding the right balance is crucial, borrow too much and the burden of repayments can prove to be unbearable. Borrow too little, and you risk being unable to fulfil your plans for growth, with the added burden of having to repay a loan that the business simply cannot afford without the additional income that was being sought after in the first place.
Therefore, borrowing just enough to address your needs with the assurance that repayments can be met comfortably, without jeopardising the sustainability of your business is the ideal scenario. This presents many small businesses with the opportunity to purchase stock, hire more staff, expand premises, increase marketing efforts or even pursue new business opportunities that would have otherwise been impossible.
Sound financial advice will help to discern how much finance is required and the best loan terms that accommodate your needs.
What types of business loans exist?
The most obvious option is to go to your high street lender or bank, but there are also a number of alternative funding options that could work just as well for your business. Here are a few options:
Business overdrafts:
A business overdraft is a revolving loan that has a credit limit and allows a business to draw on funds up to a pre-agreed credit limit.
Overdraft financing is useful when a business struggles with timely cash flow. Overdrafts are particularly helpful to cover short-term cash flow shortages from seasonal activities. Lenders tend to review overdrafts on an annual basis but it should be remembered that they can withdraw an overdraft facility at any time and demand full repayment.
Business credit cards:
Similar to personal credit cards, a business credit card can give you access to a line of credit, allowing you to make business purchases such as purchasing business equipment, paying invoices and making payments.
Business Credit Cards can benefit your business by helping you earn rewards, building business credit, and optimizing cash flow management
Businesses who want to borrow money over a period longer than a month often choose these cards for their credit.
Merchant cash advances:
Typically for retail businesses, a merchant cash advance, is a flexible business finance facility, which is used by businesses that receive payments from their customers by debit or credit card.
Any business using a card terminal to accept payments from customers can secure merchant cash advance from lenders through their terminal provider. The lender can see exactly how much money is flowing into them business on a regular basis, and the lenders provide funds in exchange for an “agreed” percentage of the business’s daily credit card income. This visibility can act as security for the loan.
Commercial mortgages:
This is a mortgage taken out to facilitate the purchase of or refinance commercial property which is to be owned and occupied by a business for their main trading purpose.
With a commercial mortgage, there will not be the risk of any sudden or unexpected rent increases, but obviously monthly loan repayments could go up if a variable interest rate is taken. To counter that you might be able to get a fixed rate mortgage for a period of time.
Another potential benefit is that if the property value increases, the business asset capital value will go up as well.
Asset finance:
This is used by businesses to buy the equipment they need to grow.
This includes things like plant, machinery and vehicles – any asset of significant value that is used in the day-to-day operation of your business.
This is a form of financing for businesses that require capital to purchase equipment or machinery instead of using own cashflow, or for companies who need to release cash from assets they already own.
Asset finance for these assets comes in the form of hire purchase, a finance lease and an operating lease.
Finance lease:
A finance lease is a lease for the purchase of a new piece of equipment. A popular finance solution for businesses who need assets or equipment, if your business doesn’t have the funds available to pay for it all up front, then a financial lease may be the ideal asset finance solution for you.
Which loan is right for me?
Each business is different, and so the loan you choose will be based on your business’s needs.
For example, a retail business raising invoices that are payable within 30 -90 days may need an invoice finance or overdraft facility to get that finance quicker.
Or for a business looking to buy new equipment; asset finance may be the solution for them.
Choosing a business loan
When choosing a business loan, it is important to take the below into consideration:
- Who is the lender and are they trustworthy?
- How efficient is the lender?
- How long will it take from application to draw down?
- Price of the loan including interest and all associated fees i.e bank fee, legal fee, valuation fee etc
- What security will they require for the loan? Could be a guarantee from a director, property from the director, security of the company assets.
- What information does the lender require before the application?
- What information does the lender require after the loan is drawn?
Best business loans long term?
Long-term business loans are best for businesses looking to spread out a large expense over a longer period. Picking a longer term can reduce the monthly repayments, making the loan more affordable. A long-term business loan can range anywhere from 5 years up to 30 years.
When looking for the best long term business loan for you, you need to choose from both variable and fixed rate of interest in order to secure the best possible deal for your business. With fixed rates, you’ll know exactly what you’ll need to repay each month whereas a variable rate will track a common national interest rate.
If you own trading premises you’ll want a longer loan, perhaps 15- 25 years. Typically, a freehold property purchase is going to cost more so you’ll want to extend the loan repayments over a longer period. This will free up cashflow to grow the business as opposed to using your profit and surplus cash to pay the loan, but you will own an asset at the end of the term.
Shorter loans are for assets that may need to be renewed or replaced – you don’t want the loan to be outstanding when you are buying a new piece of equipment. So, it is important to look at the shelf life of the kit/asset when making your decision.
What’s the best business loan for me?
The nature of loan finance required is dependent on the nature of the business, previous trading and credit history, the current business position and plans for the future.
As you can see from the few examples provided in this guide, there are many options available for businesses and it can be difficult to wade through the various options to find the right one for your business. Which is where an experienced broker can be of help.
How we can help
At Newable Finance, we have an unrivalled understanding of the local markets in which we are operating. Our advisors can help you navigate the increasingly complex lending landscape. We compare loans for you and find the most competitive finance for your business needs. From unsecured business loans to commercial mortgages, we have the experience you need.