It’s not uncommon for businesses to require large sources of capital in order for them to progress and grow, whether that be to finance expansions, cover day-to-day running costs, acquire stock, hire new staff or buy new equipment. As such, many SMEs look to business loans to gain the financial assistance they need.
Read on to find out about the type of loans available and how to choose the right one for your business. We’ll also explain how you might be able to make your business more appealing to lenders and how to apply for a business loan with Esme.
A business loan is a sum of money that is lent to a business by either a bank, an online lender or an investor. The loan is then repaid over an agreed period of time with interest applied, meaning businesses pay back more than originally borrowed.
All business loans fall into one of two categories, either a secured or unsecured loan.
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. An asset could include property, vehicles and even stocks and shares.
An unsecured loan is when the lender does not require a business asset as security. Therefore, It’s useful for businesses who 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.
There are 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.
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.
Pros: 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.
Cons: 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.
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.
Pros: 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.
Cons: 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.
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.
Pros: 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.
Cons: 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 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).
Pros: Asset finance can be used for any type of asset and there are usually multiple terms and repayment options to suit your business.
Cons: 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 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 you’re 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.
Pros: The loan unlocks any immediate cashflow and the application process is usually quick.
Cons: This loan could be more expensive than other unsecured loan options, depending on the circumstances.
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.
Pros: 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.
Cons: 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.
The requirements of what you can and can’t purchase using your loan differs depending on the loan and lender you choose. For example, if you choose asset finance, you will not be able to use the loan for cashflow or to improve working capital, as this loan must only be spent on the asset itself.
However with the majority of lenders, you can use the loan on anything business related, such as an expansion, new equipment, recruiting new staff or cash flow management.
You will be required to provide a short description on how you intend to spend your loan, therefore it’s important to check if the lender does have any requirements, before applying.
Choosing the right loan for your business could mean a secure and positive future. Therefore, it’s crucial to look at your options and choose a manageable repayment term that works for your business.
To find the right loan and lender, you should consider the following:
Once you’ve chosen your loan and researched the lender, the next step is to apply for the loan.
While there are no guarantees that you will be accepted for a loan, there are actions you can take to improve your business’ desirability to lenders.
Firstly, you must be realistic about the loan you are applying for. The more realistic you are about the loan amount and repayment term, the greater the likelihood you have of approval.
Most online lenders will offer a business loan calculator (or equivalent) on their website to give you an idea of how much you could be paying each month. This tool can give you the opportunity to evaluate your cash flow and whether making the monthly repayments will be affordable for your business.
Every business has its own credit score, similarly to a personal credit score. By actively checking and taking steps to improve your credit score before you apply, the likelihood of an accepted business loan could rise. You can check your credit score for free here.
It’s important to consider how the loan monthly repayments will affect your business’ cashflow before applying for the loan.
Choosing the right finance, amount and payment term can hugely affect how much you pay back each month. Therefore it’s important to look at the available options and consider the repayments in your cash flow. This may mean you need to increase your sales targets in order to cover the loan repayments, or chase up any unpaid invoices.
Here at Esme, we offer unsecured business loans from £10,000* to £250,000, which are repayable between a one and five year time period. All applications are done online and take just ten minutes to complete – perfect for busy business owners.
Our loans are unsecured; we only ask for a personal guarantee.
Simply fill in our online application form, selecting the amount you want to borrow and the time period in which you’re seeking to repay it. If your application is approved, we’ll send you our terms and conditions. Once you’ve accepted the terms, we’ll transfer the funds within an hour.
We’ve helped SMEs across the UK build their businesses, if you want to find out about how Esme loans has helped other businesses, visit our business stories page.
At Esme, we offer business loans ranging from £10,000 to £250,000* over a 1 to 5 year repayment period. A business loan can offer you a quick injection of capital that can help your business expand in exciting directions without having to worry about major hits to your cash flow.
Think you’re ready to make the next move? Just fill out our 10 minute application form or try our business loan calculator to get an idea of how much your monthly repayments could be.
*From £25,500 for Sole Traders