Small business loans: Which is the right one for you?
What to look out for
- Red A short-term loan will require some form of security
- Amber Long-term loans offer consistency of planning debt servicing over an extended period
- Green There is something for everyone - from an overdraft to invoice finance
Small business loans provide a range of options to promote small business funding with products designed to aid investment, debt relief and start-up business financing.
There are 5.7 million SMEs in the UK, making up 99 per cent of the businesses and more than 80 per cent of the workforce, often employing less than 250 people but in reality, often less than 10.
A large number of these UK small businesses will need some form of finance for their day-to-day operations and, more typically, when they need to invest to grow, either increasing employee numbers or buying a new piece of equipment or asset.
A small business loan is a type of debt that is tailored for this type of business. These can take many different forms but are most commonly found in the following formats:
Small business overdraft
For many small businesses the common bank overdraft is the most valuable form of finance they have. This will be reviewed annually by the lender but has the security of being available when needed. It is often cheaper as, apart from an initial facility charge, interest is only levied on the amount of borrowing outstanding and not the whole facility.
Small business overdrafts are also favoured as they can often be provided with a personal guarantee and not necessarily secured with assets of the business.
Small business short-term loan
This is another much-favoured form of borrowing for small business as it is often the least expensive form of debt finance as it can be spread over a longer period of time and doesn’t have to be annually reviewed like an overdraft.
However, generally speaking this type of borrowing will require some form of security. With so many alternative finance providers now offering unsecured loan facilities, the banks are having to review the way that they approach this type of lending as competition is increasing constantly.
Small business long-term loan
While very similar to the short-term loan, this type of borrowing is favoured by larger businesses who are looking for larger facilities and wish to have the consistency of planning their debt servicing over a longer period of time.
Long-term business loans can be the cheapest form of finance but will often be given to only the most creditworthy businesses.
Small business asset finance
This type of finance is particularly useful when a small business is looking to buy an asset. The asset itself can be used a security (it will be repossessed if the loan is not repaid) and can allow a relatively modest business to make a significant capital purchase to help drive growth.
Small business invoice finance
Many businesses in the UK operate by supplying their goods or services and then invoicing the business that bought these items for payment.
However, there is an epidemic of late payment in the UK which can often mean that while the business is doing well by efficiently making and selling their products or services, they are suffering because the purchaser will make them wait for payment.
Invoice finance allows the seller to be able to bring forward the payment on an invoice (often to the same day of the invoice being raised) and then a third party business (for a fee) will take over the collection of that invoice. Modern invoice finance providers are very technology centred and can provide an excellent and reasonably priced alternative to waiting 30, 60, or 90 days to get paid.
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