When it comes to sourcing finance for your business, there is a multitude of options to choose from. The financing option that best suits your business largely depends on why your business needs the money, for example;
- Asset finance is designed for attaining equipment needed for growth and provides a financing option for the lifetime of an asset;
- Business loans are multipurpose and can offer a flexible source of cash for any business need or objective.
Whatever your business situation may be, it’s worth exploring the options and seeing which type of finance will be best suit your situation. With this in mind and to help you choose the best finance solution for your business, we’ve covered below the three most common forms of business finance (each is covered with an overview of the option and a breakdown of the advantages and disadvantages).
Business loans can be used to finance pretty much any business need or objective. Taking on a business loan means your business will borrow money from the bank (or another lender) and agree to pay it back at regular intervals over a set period (with interest).
Business loans are usually issued over the medium to long-term (3 – 15 years). In the past to be eligible for a business loan you’d typically need to prove your business had assets of commensurate value to the loan.
This is still somewhat the case depending on the business loan provider, but for SME’s loans, below £50,000 have started becoming more accessible, requiring little or no collateral, but instead being assessed based on the trading history. If you’re business is brand new there’s also the possibility of accessing debt funding via the start up loans scheme.
In recent years there has also been an explosion of alternative finance companies offering all different types of business loans (particularly P2P lenders). This flux of new providers has lead to increased competition and as such better rates and terms for businesses, meaning it’s well worth shopping around traditional business lenders such as banks as well as newer finance providers to find the best loan option for your business.
Business loans remain a popular choice for businesses seeking finance as they offer a relatively inexpensive and quick way to access capital depending on the terms agreed / finance sought.
Asset finance is used by businesses to finance the cost of attaining and using equipment required for growth. Typically, this means your business will agree with an asset finance provider for them to purchase equipment which your business then agrees to rent from them over a certain period, over which you’ll pay regular rental charges, asset financing agreements tend to last for 1 to 5 years.
This form of business finance means you can avoid the large capital cost required upfront to purchase the equipment your business needs to grow. It’s also a favourable financing option when it comes to attaining and using assets as you don’t risk any depreciation of the asset and spread the cost of the asset over its usable lifespan.
Typically, asset financiers are used to attain machinery, specialised industrial equipment, hardware and more recently software / technology-based systems as well as other large capital purchases.
A business overdraft is an ongoing loan account you are provided with by the bank or provider, in turn, the bank will charge interest on any amount of this loan you actively use (you typically have an agreed limit).
Business overdrafts can be a very useful and flexible finance product for managing cash flow, as they give you a short-term finance facility that your business can dip into as and when it needs finance during the month and not be completely reliant on receivables to finance expenditure.
Typically, overdrafts are granted/reviewed on an annual basis (it’s important to know the bank/lender can usually decide to pull the overdraft at any point an and demand payment of the amount owed).
Given the short term nature of an overdraft, interest rates are generally much higher than loans but if looking for a short-term finance facility to help with cash flow, then overdrafts are one of the best forms of finance available (you could also explore other forms of finance such as invoice finance).