Types of lending

Business loans are very common and are one of the first options for businesses looking to raise finance. There are many types of business loans available in the UK and I refer to some of the main ones in this article.

Secured loan

This is a type of loan where the business provides some sort of collateral as security, typically in the form of an asset, such as property, machinery or a vehicle. The lender may also consider third-party security instead of or alongside other security.

For this reason, secured loans are more suited to established companies rather than start-ups.

With a secured loan you may be able to borrow more and the interest charged will usually be less as the lender has recourse to the secured assets if you can’t pay.  On the flip side, if you don’t pay the lender can ultimately take ownership of the asset you have given as security.

Unsecured loan

An unsecured loan allows you to borrow money without using business assets as security. A lender though may ask you for a personal guarantee. This means that if the loan isn’t repaid, the lender could ultimately pursue you for payment.

Unsecured loans are particularly suitable for new starts or companies that do not have assets available to use as security.

As the lender does not have recourse to security if the company’s doesn’t pay, unsecured loans carry more lender risk and therefore tend to be for lower amounts and have higher interest rates.

Short-term business loan

Your business may just need a quick cash boost and you don’t want long-term commitments. This is where a short-term business loan may be useful.

Loans can be made available for short periods of time of just a few weeks or months. However, because of this they usually come with high interest rates and, therefore, are only really suitable for short-term/interim needs.

Peer-to-peer business loan

A peer-to-peer loan involves your business borrowing money from investors instead of from a bank. It usually operates through a specialist online platform that allows you to access a loan funded by individual investors.

Peer-to-peer lenders often have less rigid lending criteria than traditional lenders and therefore obtaining a loan can be less onerous and you can get your cash more quickly.  That said, interest and costs can be significantly more than for bank loans so again peer-to-peer business loans are more often utilised as an interim financing solution.

Invoice financing

Invoice financing is where the lender buys your outstanding invoices, thereby releasing the money you are owed by customers. This is particularly attractive to businesses in sectors which maybe require to operate under long credit terms or where, despite there being strong contractual arrangements, cash receipts are lengthy or inconsistent.

There are two main types of invoice financing: factoring and discounting. Factoring is where the lender manages the sales and collects money directly from your customers. Discounting is where lenders release funds and you pay back the outstanding balance as your invoices are paid by customers, so you remain in control of the process and customers are usually not aware of the financing arrangements.

The lender makes their money through applying a service or discount charge.

Invoice finance providers will lend to numerous different industries and business sectors but will always require to be satisfied before lending with the robustness of the contractual arrangements and customers underpinning the invoices against which they are lending.

Asset Based Lending

Asset-based lending is a form of finance that uses assets on your balance sheet as security against lending.

This includes physical assets such as:

• debtors
• stock
• equipment
• machinery
• property

If you meet the eligibility criteria, it can be quick to receive the money. You can also use other forms of finance alongside asset-based lending.

If you do not repay the lender then it shall have access to and can take ownership of those assets to recover its debt.

The above highlight some of the main business loans available. Each loan though shall need to be appropriate to and suitable for your business and its need.  We can help you identify the loan most suitable for you and assist in getting you access to relevant lenders.  To discuss further please contact Craig Darling by email: cdarling@gilsongray.co.uk or by phone: 0141 530 2044/07841 920 467