Accessing sufficient finance can be difficult for many businesses, especially smaller and newer ones. The problem has been exacerbated over the past few years by mainstream lenders’ greater caution and by higher interest rates. However, help is at hand. There are many sorts of loans available and many types of lender, so a company with reasonable financials should be able to find what it is looking for.
A secured loan is one where the borrower has to put up an asset as security against defaulting on the loan. Usually this would be the borrower’s home but it could be a car or other high value asset. Like any loan it has to be repaid in full with interest over a set period of time.
Secured loans often have lower interest rates as the lender views them as less risky because it can recover the value of the loan from the asset if the borrower defaults. Furthermore, as they are lower risk for the lender, they can be for longer periods and larger sums. High street banks offer loans from £1,000 to £25,000 or £50,000 or potentially more, and terms can be as much as 10 years or even more.
Lenders do not require an asset as security when making unsecured loans and because of this interest rates tend to be higher. The borrower’s finances and credit rating will be carefully scrutinised to ensure they will be able to afford the repayments.
It may be that a company director or owner has to provide a personal guarantee that he or she will repay the loan if the company falls behind on payments. Again, the high street banks have a range of products aimed at growing businesses.
A short-term business loan is useful when a company has a temporary cash flow problem, for example, a loan to buy a new vehicle before it has sold the old one. Interest rates tend to be higher than those for long-term loans but they are usually relatively quick to arrange. Typical repayment periods vary from a few months to two years. They are also known as bridging loans.
Businesses that have temporarily run out of money but are underlying sound may turn to a working capital loan. Working capital is, put simply, the money the company has left after its current liabilities are deducted from its current assets over the current year.
This form of business finance is useful for companies that have predictable, cyclical revenues, for example, a holiday caravan park. By February or March its coffers will be running out after months of low booking levels and it may need to spend on refurbishments for the next holiday season. Once the season is in full swing it can repay the loan.
Working capital loans can also be useful for buying large amounts of stock when revenues are low or to settle major annual bills.
This method of business funding is secured by the money owed on unpaid invoices. It is helpful when customers are slow to pay their bills. The business owner passes the unpaid invoice to a lender, which then grants a loan that is likely to be 70 to 90 per cent of the money owing. The business then repays the loan when the invoice is paid or when funds allow.
Invoice financing should not be confused with invoice factoring where the factor buys the unpaid invoice from the company at less than its face value.
The way to distinguish them is by looking at who receives the money owing. If it is the company that issued the invoice then the loan is invoice financing; if it is the third party company then it is invoice factoring. In the former case, the debtor will not know invoice financing is involved.
This type of business finance is another sort of secured borrowing. The loan is secured against assets such as machinery or equipment, allowing companies to purchase assets they need that they can’t otherwise afford.
Asset financing comes in two main types: leasing or hire purchase. In the former case the company is in effect renting the tools or equipment it needs and will return them at the end of the lease period. In the latter the regular payments eventually lead to outright ownership of the asset.
In another form of asset finance, the lender advances cash using an asset owned by the company as security.
This is a very flexible form of business finance akin to a credit card. The credit is made available and the company can borrow as much or as little as it wants, when it wants to, up to its limit, only paying interest on what it does borrow. Companies often have what is known as revolving credit lines, which means once they have paid back earlier borrowings they can access the full amount of the credit line again. Secured and unsecured lines of credit are available.
In this method of business funding the company repays the loan a small bit at a time each time a customer makes a card transaction, as a fixed percentage of every transaction is returned to the lender until the loan is paid off. Obviously this type of business loan is mainly for retailers and other high street businesses whose revenues largely derive from debit and credit card transactions. Merchant cash advances have the advantage that repayments rise and fall depending on how the business is doing, making a default much less likely.
Merchant cash advances will often be less than other forms of loan because they rely only on card transaction revenues, which may not be all of a company’s income. The lender and the provider of the card terminal work together to provide the loan.
The GLIF can offer between £100,000 and £1 million to companies based in the capital. It is aimed at those who cannot access private sector finance, so typically a company whose financial history is poor or that does not have collateral to put up as security.
These lenders are online platforms that connect investors with companies. They are not banks but are regulated, like them, by the FCA. They pride themselves on quick turnarounds on applications, and a largely online operation without legacy costs means they can offer competitive rates. Unsecured loans are available and borrowing can be between £50,000 and £1 million typically. In some cases, there are no fees or repayments in the first 12 months.
Central and regional governments offer a range of loans to businesses. The most important lender is the British Business Bank.
The institution’s loan offers include the Recovery Loan Scheme, which aims to help companies get back on their feet after the coronavirus pandemic. Firms outside Northern Ireland can access loans of up to £2 million and those within the scope of the Northern Ireland Protocol can access up to £1 million. Minimum financing is £1,000 for asset and invoice financing. The bank doesn’t just offer straightforward loans – companies can apply for overdrafts, asset finance and invoice financing.
Companies can apply for a Start Up Loan of between £500 and £25,000 through the British Business Bank. Such loans are unsecured personal loans and companies will need to pass a credit check. In addition the scheme offers help with writing a business plan and up to 12 months of free mentoring.
Innovate UK will provide up to £25 million in loans to micro, small and medium-sized enterprises for highly innovative late-stage research and development projects that have realisable commercial potential and that will bring economic benefits to the UK. There are regular competitive funding rounds throughout 2024. Loans start at £100,000 and top out at £2 million.
With such a wide range of funding options available it is worth seeking professional advice about what sort of loan is best for your business. The accountants at Finsbury Robinson would be happy to help so please give our friendly team a call on 020 8858 4303 or email us at info@finsburyrobinson.co.uk
