Understanding the Different Types of Business Loans
Choosing the right loan for your business can be challenging. This guide will help you understand the different types of small business loans and their benefits.
Business Loan
A business loan is a sum of money provided by a lender to a business, repaid with interest over a set period. These loans can fund various needs, such as starting a new business, expanding operations, purchasing equipment, or managing cash flow. Business loans come in various forms, including term loans, lines of credit, and equipment financing, with fixed or variable interest rates. Loan terms are determined by the lender based on the business’s creditworthiness, financial history, and loan purpose.
What Are Business Loan Lenders Looking For?
- At least 1+ years of trading, with up-to-date accounts reported to Companies House.
- Minimum 10% profitability to demonstrate your ability to afford monthly repayments.
- A clear plan of how the money will be used.
How Much Does It Cost?
- Loan amounts typically range from £10,000 to over £1,000,000, up to 25% of your annual revenue.
- Interest rates usually range from 7% to 30%.
- Loan terms span from 1 to 10 years.
- Repayments are generally made monthly via direct debit.
Line of Credit
A line of credit is a versatile loan offering a specified amount of funds that you can use as needed. You can repay the borrowed amount immediately or over time with regular minimum payments. Interest accrues as soon as funds are drawn.
Requirements:
- At least 6 months of trading to show business stability.
- A personal guarantee, such as property, vehicle, stock, investment, or cash.
How Much Does It Cost?
- Credit up to 10% of your annual revenue.
- Costs range from 7-25% of the credit limit, plus an additional fee each time it’s used.
- Terms range from 6 months to 5 years.
- Repayments are generally made monthly via direct debit.
Revenue-Based Finance
Revenue-based finance (RBF) provides capital in exchange for a percentage of future revenue. Instead of fixed interest payments, repayments vary with the business's income, offering flexibility for companies with fluctuating revenues.
Requirements:
- At least 3 months of trading history.
- Consistently high gross margins of 30% or more.
- Monthly sales over £5,000.
- Majority of sales via online platforms like Shopify or Amazon.
How Much Does It Cost?
- Lenders typically offer an amount equivalent to one month's sales.
- The fixed fee ranges from 4% to 25% of the borrowed amount, averaging 12%.
- Repayments are a percentage of daily or weekly sales, often deducted directly from card terminals or platforms like Stripe or Shopify.
Examples of Lenders:
- Uncapped: Offers funding based on a percentage of your future revenue, particularly targeting e-commerce businesses.
- Clearco: Provides revenue-based financing to online businesses, with flexible repayment terms.
- Wayflyer: Specializes in funding for e-commerce businesses, with repayments tied directly to revenue.
Invoice Finance
Invoice financing allows businesses to borrow money using their outstanding invoices as collateral. The lender advances a percentage of the invoice's value, providing quick access to funds before customers pay.
Requirements:
- Business customers (B2B only).
- Reliable and trustworthy business customers improve your chances of securing better rates.
How Much Does It Cost?
- Lend up to 95% of the value of unpaid invoices.
- Fees range from 1-5% of the invoice value, plus a setup fee.
- Payments are taken directly from your business customers who pay the lender.
Business Credit Card
A business credit card provides a revolving line of credit for business expenses, offering features such as expense tracking, rewards programs, and higher credit limits. It helps manage cash flow, separate personal and business expenses, and build the business's credit history.
Eligibility:
- Limited company or LLP.
- Active on Companies House.
- Active director or majority shareholder with 25%+ ownership.
- Minimum monthly turnover of £2,000.
- No unsatisfied CCJs against you or your business in the last 12 months.
