Different types of business loans
Business loans usually pay out a set amount at inception which is then repaid using fixed or variable monthly repayments over a set period of time. Commercial lending is much wider than this and covers a number of individual products, many of which operate by offering a facility for lending rather than extending a set amount at inception. For this reason, we have created more detailed pages designed to demystify and make business lending and commercial finance simple and easy to understand. The products we will cover are as follows:
- Unsecured Business Loans
- VAT Loans (Value Added Tax)
- Revolving Credit Facilities
- Secured Business Loans
- Merchant Cash Advance
- Commercial Mortgage Loans
- Short Term Business Loans
- Medium to Long term business loans
Business Lenders, how they may differ and what to consider.
Enable Finance work with over 200 lenders to ensure our clients have the best representation of the market. Every lender is different, interest rates, application processes, fees and costs, lending parameters, eligibility criteria all are nuanced to that specific lender. However, this is where the power of Enable Finance comes in, we get to know your business objectives
and your key requirements to help you select the best loan option for your Company. Let’s delve deeper into the different types of lenders.
Traditional UK High Street Banks
The financial crisis, legacy debt, stricter regulation and security covenants often make a bank loan with the big 5 UK Banks far more difficult than it really needs to be. That said a high street bank loan for the right customer result in a good interest rate. It’s often the case that you will need to move your day to day banking and tangible security is usually sort with loans greater than £25,000.
Firms considering the high street banks will typically need a strong balance sheet, proven profitable trading history, possibly significant security and a lot of patience as the application process can be lengthy. However, for the right business with all the correct credentials in place, it can be a good option.
Challenger & Boutique Banks
Challenger Banks are a welcome addition to the commercial lending environment as they are less restricted by poor historic lending decisions. The new challenger Banks are often quite specialist and are often only accessible via accredited financial intermediaries and brokers. These banks will still typically assess the business in similar ways but they may have a broader credit appetite and niche lending products. It’s worth noting that all bank lending is constrained within the confines of the Prudential Regulation Authority.
Alternative Finance & Independent Lenders
These lenders are typically more flexible and usually offer a greater degree of funding solutions. The larger independent lenders are all well-established providers of commercial finance who whilst smaller than the high street banks often have hundreds of millions to lend. Alternative & independent lenders can usually taker a broader view at a Companies circumstances enabling them to offer a loan where a bank may not have. Independent lenders will typically distribute their products via reputable commercial finance brokers who will understand the lender’s eligibility criteria allowing them to accurately promote funding proposals. Rates may be slightly higher than the banks but their appetite to lend can be a welcome result.
Small Specialist Lenders
Highly agile lenders that form a significant function within the alternative finance landscape.
What to consider when thinking about which type of business loan you need?
At the centre of your thoughts should be your overall goal or business objective. For example; you have won a new contract and you need more staff and materials to fulfil and complete the job. In this situation, your objective is to secure further working capital to bankroll new staff and buy materials until you can invoice the customer.
Before you proceed with applying for a business loan or commercial lending facility it is important to work out what the funding will generate your company as a return on investment (ROI). So taking the above example what profit will you make from the new business. Ask yourself is this, is it a high profit but a one time order, or is this low profit but with high-frequency repeat orders?
Next, consider the logistics. How fast do you need everything in place to make good on this new business? Do you have days, weeks or months to have your business funding in place and in your bank account? Obviously, if you have days you will need the funds fast.
How long will it take you to build, create or complete the work you have won? Is this a fast moving job that will be out the door in days or is this a slow and drawn out process? (your trade cycle
). This will help you appreciate if a short-term business loan will work or if your repayments need be stretched over a longer period of time.
Now considering the profit in the job, speed within which you need the funds and your trade cycle you should be starting to build up a requirement specification and an understanding of what overall cost of borrowing your business objective
You can now move onto what if any security you are prepared to offer the lender? For example, will the size of the loan required and the financial strength of business allow you to borrow an unsecured business loan or does the size of the loan or risk profile require a pledge of security? A good rule of thumb, large business loans will typically require security which may include an all asset debenture. Smaller business loans below £500,000 may be considered on an unsecured basis subject to risk profile. However, for stronger more profitable Companies this may be higher. We go into more detail about risk profiles and eligibility criteria below.