A guide to the types of business loans in the UK

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When it comes to businesses, there are several financing options available here in the UK. Whether you are a small start-up or a large, well-established company, the UK market offers a variety of business loans.

Secure loan

This is a type of loan where the company provides some kind of collateral as collateral. This security usually comes in the form of an asset, such as real estate, machinery or a vehicle. For this reason, secured loans are more suitable for established businesses than start-ups.

The advantage of a secured loan is that your business is usually able to borrow larger amounts and the interest rate is usually lower than an unsecured loan. Lenders are usually willing to lend more and offer better rates because your business has provided security in the form of this asset.

However, keep in mind that if you fail to repay the loan, the lender may claim ownership of the asset you borrowed against.

Unsecured loan

An unsecured loan is a lump sum that is not backed by an asset. Instead, you may find that the lender asks for a “director’s guarantee.” This means that if the loan is not repaid, the lender could sue the principal for payment.

Unsecured loans are ideal for start-ups or small businesses that do not have significant assets to secure a loan.

Unsecured loans tend to be for lower amounts and come with higher interest rates than secured loans because no collateral has been provided.

Short term business loan

Sometimes businesses just need a quick boost and don’t want to be stuck with paying back for a long time. This is where a short-term business loan can come in handy.

These loans are offered over a few weeks or months and can be up to £200,000. However, because they are for a short term, these loans tend to have higher interest rates than other loans.

Peer-to-peer business loan

This type of business loan involves your business borrowing money from investors rather than a bank. It is usually carried out through a specialized online platform and allows a company to access a loan financed by individual investors.

An advantage of using this type of financing rather than a traditional bank loan is that the borrowing criteria are often less strict and you may be able to receive the money more quickly. However, the costs can sometimes be higher than they would be if you were dealing with a bank.

Invoice financing

This is where a lender buys your unpaid invoices, freeing up the money that customers owe you.

There are two main types of invoice financing: factoring and discounting. Factoring is where the lender handles the sales and collects the money directly from your customers. Discounting is when lenders release funds and you pay off the outstanding balance as your bills are paid by customers.

The cost of this type of borrowing comes in the form of service charges or discount. Service fees are calculated as a percentage of your company’s gross revenue, while discount fees are similar to interest payments on a business loan and are taken from the money you withdraw.

cash advance loan

A cash advance loan allows you to borrow money against future business debt or credit card sales. One thing to be aware of with this option is that it is difficult for lenders to quote an interest rate, as the amount you need to repay depends on your corporate card revenue. Instead, there will likely be fees when you take out the loan, and then daily fees going forward.

Government-backed start-up loan

New businesses may struggle to obtain financing. Many business loan options require you to provide income tax returns, current balance sheets, and profit and loss statements for the past two years – something you won’t have if you’re just starting out. Instead, there are now specific business loans aimed at start-ups.

These government-backed personal loans are available for people wishing to start or expand a business in the UK. They are unsecured, so there is no need to present any assets or guarantors, and they also come with 12 months of free mentoring.

Other financing options

As we have seen, there are many financing options available to businesses in the UK. And it’s not just business ready. If you’re looking for a little extra cash to support your business, maybe also consider a business credit card, overdraft, government grant, or crowdfunding.

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