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A business loan comparison guide

Join Esme to find out about the type of loans available as well as their advantages and disadvantages.
A business loan comparison guide

Updated on 9th June 2020

For business owners who are looking to grow their operations, expand their reach, maintain their output or keep their business afloat during difficult times - a business loan could prove to be helpful. But there isn’t just one type of business loan; there are many, each with different distinctions, purposes and applications.

If you’re looking for a business loan, it could help to have an awareness of what the main types of business loan are to ensure that you can find a loan that is tailored to your business’ immediate needs and its wider strategic objectives.

In this article, we will:

Read on to find out the pros and cons of each type of loan to help you decide which is best for your business.

Short-term versus long-term business loans

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Loan repayment terms - the length of time over which your loan will be repaid - vary with each and every business loan. Typically, and with the vast majority of lenders, the time period can be tailored to your business's needs in that moment in time.

If your business needs capital with a quick turnaround - perhaps to counter sudden difficulties like cash flow problems or seasonality - then a short-term loan could be a great choice. You receive the money fast, and then be able to pay back the loan over a time period ranging from just a month to two years. Most lenders also offer an easy application process with forms designed to take as little time as possible.

Alternatively, if you have a less urgent need for capital, you could consider a loan with a longer repayment term. This has the added benefits of building up your credit score over time – increasing your chances of an approved application.

It's worth caveating that short-term loans aren't necessarily more expensive than long-term ones, despite the fact that interest rates on short-term loans tend to be higher. It's because a long-term loan's repayment will be made over a much longer period. As such, when considering between several options, it’s important to always calculate the full amount that you'll be repaying, before making a commitment to a loan. Many lenders offer online calculators that make this an easy, straight-forward process.

Secured versus unsecured business loans

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Whether short or long term, all business loans fall into one of two categories; they’re either a secured or unsecured loan.

Secured business loans

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A secured loan is when the lender requires an asset as security in case the borrower is unable to pay the loan back. If the loan is not repaid, the asset would be taken and sold in order to cover the funds the lender has lost. Examples of assets could include property, vehicles or even stocks and shares.

Unsecured business loans

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An unsecured loan is when the lender does not require a business asset as security. Therefore, it’s useful for businesses that may be unable or unwilling to provide an asset as security. However, the lender will often require a director’s guarantor as security. This is when the company’s director is liable in case the business is unable to make a repayment.

Unsecured business loans can also offer flexible repayment options that may work better for a company.

Both secured and unsecured loans offer different advantages. If you're borrowing a large amount, then a secured loan could be more suitable for you; it’s a safer option for the lender, as there’s an immediate security they can fall back on, and, typically, repayment plans are much more flexible. However, if it's just a small amount of short-term capital that you're looking for, an unsecured loan could be easier and quicker to obtain as there’s no need to specify an asset. Either way, think about what you need from your loan, and select your option accordingly.

Types of business loans for SMEs

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There is a huge range of loans available for business owners. Read on to find out about the pros and cons of the most popular finance options available for SMEs.

Short term business loan

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A short term loan is when you lend money over a short period of time. The application process and speed of transferring the funds is usually quick, so it’s particularly useful for businesses looking to cover any short term issues such as cash flow or unexpected bills, and avoid repaying the loan over a long time period. The repayment term can generally vary from 1 to 24 months.

Advantages of a short term business loan

The biggest benefit of a short term business loan is that the funds will usually be in your account soon after being approved. The application is usually done online and is designed to be simple and quick for even the busiest of business owners.

Disadvantages of a short term business loan

Short term business loans do usually have high interest rates compared to longer term business loans. A longer term loan may not necessarily save you money if you’re looking to lend the same amount, as you will be paying interest back over a longer period of time. It’s always best to check the total figure you will be paying back when comparing loans.

Merchant cash advance

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If you take payment for your product or service by debit or credit card, you will have a card terminal. All card terminals have a terminal provider, who process your payments and manage your card terminal.

A merchant cash advance loan is when a lender works with the terminal provider (with your permission) to gain access to your business’ income, taken through the card terminal. The lender will then offer you a loan based on this amount.

The repayments are then taken as a percentage of revenue, increasing or decreasing depending on your business’ income through the card terminal. The repayments are also taken at source, which means the repayments will automatically come out of your account, similarly to a personal tax or student loan.

Advantages of merchant cash advance

There is usually no need for credit checks as the lender has visibility of how much money your business is making. It’s particularly useful for bars and nightclubs who may usually find it difficult to source finance.

Disadvantages of merchant cash advance

You must have a card terminal in order to be eligible for the loan. The amount you can borrow is relatively low, usually only one or two times your monthly income from card payments.

This loan is best suited to businesses who receive the majority of their income through a card terminal. Cash itself isn’t factored into the equation, and so if your business handles more cash payments, then your loan amount may be very low. Many lenders also only work with specific terminal providers, limiting choice.

Revenue advance

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A revenue advance loan is an advance of funds based on your business’ expected profits and sales. Repayments are made by paying the lender an agreed percentage of your monthly turnover until the loan is paid off in full.

Advantages of revenue advance

Similarly to a merchant cash advance, payment fluctuates depending on sales. Therefore, when sales are low, you pay back less. When sales are strong, you pay back more.

Disadvantages of revenue advance

It can take a few weeks to receive funds after applying for them, funds and loan costs can also be higher in comparison to other business finance options.

Asset finance

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Asset finance is a loan used for a business asset such as a vehicle or a piece of equipment. Asset finance loans are usually fixed, and so you’ll know exactly how much you’re paying each month.

There are multiple types of asset finance available, such as hire purchase and finance lease. Hire Purchase is a financial agreement that allows you to purchase an asset over a set period of time. The asset would be paid for in instalments and would not legally belong to your business until it has been paid in full.

Finance Lease is a type of finance that allows your business to exclusively lease an asset but not own it. Instead, the asset would belong to the finance company that hires it. Therefore the asset will never belong to your business (although some lenders may give you the option to purchase the asset after the lease period).

Advantages of asset finance

Asset finance can be used for any type of asset and there are usually multiple terms and repayment options to suit your business.

Disadvantages of asset finance

Payments may be required upfront and you will be paying a lot more for the asset than if you bought it outright. You are responsible for any damage or risk to the asset, even if you don’t own it.

Invoice finance

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Invoice finance is when a lender agrees to buy any unpaid invoices with a fee applied. This type of loan frees up any cash flow that may be tied up in unpaid invoices.

An invoice finance option should only be considered if your company is going through cash flow difficulty due to unpaid invoices. This type of loan can be expensive, so it may be worth comparing interest rates with other available loan types. Invoice finance loans are normally fixed term, so you’ll always know how much you’re paying back.

Advantages of invoice finance

The loan unlocks any immediate cash flow and the application process is usually quick.

Disadvantages of invoice finance

This loan could be more expensive than other unsecured loan options, depending on the circumstances.

Start-up loan

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Start-up loans range from £500 to £25,000 and can be repaid over a one to five year period. The majority of start-up loans are backed by the government, as start-up businesses are considered as ‘high risk’ to lenders. The loan offered is unsecure and therefore no specific business asset needs to be used as security.

Advantages of a start-up loan

As one of the only financial loans available for fledgling businesses, start-up loans have low interest rates compared to other personal finance options. They also often offer free advice and mentoring for 12 months after the loan is taken out.

Disadvantages of a start-up loan

The loan is not available for established businesses and is therefore exclusively for start-ups. The loan would also act as a personal plan, because your business is not yet fully established. As a consequence, if you are unable to make any monthly payments, your personal assets and credit may be at risk.

How to choose the right business loan for you

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It could benefit you to look at the different loan options available to you, and choose a manageable repayment term that works for your business. When you’re looking to take out a loan, be sure to read and re-read the terms and conditions associated with each loan, and become aware of any additional fees that may apply.

To find the right loan and lender, you should consider the following:

  1. How much are you looking to borrow? If you are looking to borrow more than twice your monthly revenue, you can immediately rule out loans such as merchant cash advances and revenue advances.

  2. What do you want to use the loan for? If you intend to spend your loan on developing your office space, you can rule out asset finance as the loan is not being spent on an asset.

  3. How long are you looking to repay the loan? If you’re looking to borrow a large sum and repay it over a 5 year period, a short term business loan would not meet your business’ needs.

  4. What can you afford to pay back each month? Ensuring your business can meet the monthly repayments is essential. Therefore, before applying you should work out how much your business can sensibly afford to pay back each month.

  5. Do I meet the eligibility requirements? When choosing a lender and more importantly before applying for your loan, always check to ensure you meet the lender’s eligibility requirements. If you do not meet the requirements, the likelihood of being accepted for the loan is very slim.

  6. How quickly would you like to receive the funds? If you’re looking for a quick capital injection that is time sensitive, an online business loan lender may be more suited than a bank as the application process and the transfer of funds is considerably quicker.

We have outlined the pros and cons of a range of different lending options in this article, as well as some of the steps you may want to consider before taking out a loan. At Esme, our loan product is an unsecured business loan which ranges from £10k to £250k (or from £25k for sole traders) - you can learn more about our offering and eligibility here.

To help you understand how you could use a business loan to help you find success, we have prepared a guide to small business loans - as well as a guide on how to apply for one.

How could Esme Loans help?

These are difficult times for many businesses, so it’s important now more than ever, to take good care of yourself and your team. If you’re concerned about your business being impacted financially due to coronavirus, visit our advice page for information about how we may be able to support you.

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