If you are looking to take out a loan for your business, it can be difficult to know what to choose with so many options available. Before seeking funding, consider what the needs of your business are at this stage and what repayment plan you can realistically stick to. Knowing your financial needs and being realistic about your current situation can help you make the right decision for financing your business. Here we share the different types of business loans and when they might be suitable.
Secured loan
A secured loan is one in which a type of collateral is used as security. This could be property, machinery or a vehicle as a way to raise money for your business. It is generally recommended that secured loans are better for companies which are more established rather than startups as they offer a greater deal of financial risk.
One of the good things about secured loans is that they typically facilitate your business to access larger amounts of money and offer lower interest rates than unsecured loans. Because you have secured the loan with collateral, it is less risky for the lender and thus they are usually willing to lend more and with more favourable rates.
However, the risk of a secured loan is that if you default on the loan, lenders can claim ownership of the asset that you have used as collateral.
Unsecured loan
Unsecured loans are loans which allow you to borrow money without the security of collateral. These can be a lifeline for startups, consumers or small businesses who do not currently have large assets to use as security for a loan. Unlike secured loans, unsecured loans tend to be for smaller amounts of money and typically incur higher interest rates so it could be a more expensive way to borrow.
To take out an unsecured loan, your lender may ask you for a ‘director’s guarantee’ which means that should the loan be defaulted, the lender could ask the director for payment.
Short-term business loan
Taking out a short-term business loan can be a good idea for companies that need to inject cash but who do not want to be caught in a long-term repayment plan. Short-term business loans are typically offered over a few weeks or months and can be up to £200,000 depending on the lender and the financial situation of the company. It should be noted that due to the short-term nature of these loans, they typically incur higher interest rates than other forms of borrowing.
Government-supported startup loan
When starting out, it can be difficult for businesses to secure funding and they often need to jump through a lot of hoops. Not only that, startups will not have many of the things requested by lenders (e.g. profit and loss statements, balance sheets, tax returns). To help companies like this, there are specific business loans aimed at startups and emerging businesses.
There are government-backed grants available which can offer support to individuals who want to start a business in the UK. These loans are a form of unsecured financing meaning that there is no need to put any collateral as security. In some cases, they even come with mentoring and guidance which can help accelerate your startup.
Peer-to-peer business loan
Rather than borrowing money from a bank, peer-to-peer business loans involve borrowing money from investors – a process which can be done online. Lending criteria is often less strict for this type of loan and sometimes enables you to access funds quicker; however, they can also be more expensive than typical loans.
Invoice financing
With invoice financing, your lender can buy your outstanding invoices and lend you the money that you are currently owed by customers. Once the invoices are paid, you can pay the money back – with the lender either collecting money directly from customers or from you after you receive the money. Rather than working with interest payments, these loans work with a service charge based on a percentage of the company’s gross turnover.
