What are the different types of business credit?
The secret to a fruitful business is finance, and in the absence of finance, it is impossible for a business to achieve its primary goal of profitability. However, it is not always possible to have enough in savings and available funds to meet the basic expenses of your business. In this case, you will need to apply for business credits or loans.
You require a start-up business loan especially when you are setting up your business. However, the lenders do not offer start-up business loans to those businesses that are completely new and have not reached the two-year operational mark yet. If you are one of those and want funds, the following are the types of business loans you can consider.
Unsecured start-up business loan
An unsecured start-up business loan is designed for the business that does not have assets to offer as security, such as capital or property. This type of loan is excellent for start-ups, which operate in small teams or on low resources.
You can consider taking an unsecured start-up business loan if your requirement is less than £100,000. The benefits of choosing an unsecured start-up business loan are that you are offered flexible repayment options and you do not need to risk your assets or provide equity.
However, unsecured start-up business loan comes with a high-interest rate. Even your business credit will be a deciding factor. Sometimes, you may be asked to give a personal guarantee.
Secured business loan
A secured business loan is the type of business loan that requires an asset offered as security, which means the lender can claim the asset’s ownership if a business fails to repay the loan. Usually, businesses take up secured business loans when they require larger amounts. This type of loan is easier to get if the business has had a limited credit history. Additionally, these loans come with low-interest rates and higher payment terms.
While going for this type of loan, it should be noted that the business might end up losing the secured asset in case of non-payment. Entrepreneurs can still be asked to give personal guarantees.
Short Term Business Loan
A short-term business loan is useful when your business requires help to support a new project or quick cash injection. The term period is usually six months and it needs to be repaid quickly.
People usually opt for a short-term loan when they want to borrow for covering cash flow issues. Another desirable aspect is that the process is fairly quick and one can receive the loan within hours of applying.
However, short-term loans come with a higher rate of interest and may require details of trading history or turnover.
Merchant Cash Avenue
It is recommended for those businesses that need brief payment terms with regular and short payments. Every time a business makes a sale with a debit card or a credit card, the lender will automatically take a percentage of the sale until the payment is received in full. You can understand it as an unsecured advance of funds, which is based on future sales/profits.
You can choose this type of business credit when you want to know the accurate amount you have to repay from the outset. A benefit of this type of loan is that you can adjust your payment according to your business’ trading performance. Getting funding through a merchant cash avenue can cost more, and not have defined endpoints to repayments.
It is a type of business loan where your monthly payment decreases or increases based on your revenues. Rather than repaying a fixed amount every month, the lender allows the business to pay an agreed percentage of their monthly sales until the advance with interest is paid in full. A seasonal business will benefit from revenue-based loans since they will be able to repay more when the sales are high and less when the sales are low.
The benefit of revenue based credits is that you do not need to give away your equity, and there are no hidden fees, penalties, or charges involved. However, when your business experiences slow sales, the repayment may take longer to be completed, increasing the total cost of the loan.
Using asset finance means taking out a loan to lease or buy assets needed by your business to thrive. You can buy or lease anything from vans to office equipment depending on the nature of your business.
If you choose to lease, the bank will buy the asset for you to use, in return for regular payments. Hire purchase or leasing helps to maintain cashflow and allows a higher flexibility in upgrading equipment.
The only drawback is that you will not be able to alter or cancel an agreement once entered into. Sometimes, leasing can be more expensive than buying the asset.
This type of finance is used when you domestically or internationally sell goods. The lender offers you the payment for those goods and takes ownership of the good until they are in transit. And when you make the payment to your lender, the goods will be given to you.
This type of finance is usually preferred by those who deal with goods in transit, as it is a form of risk mitigation. Both the seller and the buyer do not have to worry about losing their money, and also have cash. This type of business loan has promoted international trading tremendously.
Invoice financing refers to a situation where you sell your unpaid invoices to a third party for a fee. Invoice financiers can either be a part of financial institutions or be independent.
Invoice financing unlocks cashflow tied up in invoices immediately. The process of application and approval of invoice finance is pretty fast. However, one must obey to the credit terms offered by the invoice financier.
The Bottom Line
Not everyone has the capacity to meet their business expenses through their savings and personal funds, especially those who are starting up or expanding. Thus, the need for borrowing finances from financial institution arises. You can choose any of the above-mentioned business credits based on your requirements, and grow your business.