The economical landscape at the moment is a difficult one for SMEs in the UK to navigate. Stagflation, rising overheads and increasing supply costs together constitute a perfect storm, squeezing the smaller companies that make up more than half of the union’s private sector GDP. To that end, even sustaining business can seem an uphill struggle, let alone facilitating growth. This is where the business loan comes in; a powerful tool for businesses to utilise to not only weather the storm of recession, but also to target specific areas of growth with an up-front or long-term cash injection. There are various different kinds of business loan, though – and here, the main iterations are briefly defined.
Secured Loan
A secured loan is simply a loan which is ‘secured’ against items or assets of value, which act as collateral in the event that a business fails to honour their repayment terms. Security tends to be in the form of physical business assets, from property to company vehicles and equipment – though private assets can also be used to secure a business loan in certain cases. Secured loans can come in different forms, but owing to their low level of risk they tend to be for larger sums and longer terms.
Unsecured Loan
Conversely, choosing an unsecured loan means your business does not need to provide collateral, presenting smaller businesses with a low value or footprint an opportunity to benefit from financing options. To compensate for the higher level of risk, unsecured loans tend to be smaller, shorter-term and higher-interest – but are also easier to access, and can be scaled according to your business’ financial performance.
Peer-to-Peer Business Loan
For the small business, a peer-to-peer business loan is much the same as an unsecured business loan with a major lender. The key difference lies in the provenance of the loan money, in this case being provided by a pool of private investors instead of a single financial organisation. Investors each commit a small sum of money to your business via an intermediary, to which you repay the loan over time. This process allows private investors to grow profits from loan-based investment, and allows small businesses to access up-front cash injections easier.
Invoice Financing
Invoice financing is a unique kind of business loan, otherwise known as ‘accounts receivable financing’. The practice is a form of short-term business loan, where customer credit is offset through a lending institution – allowing you to essentially receive your customer’s payment up-front while still offering them a generous credit agreement.
Merchant Cash Advance
While not strictly a loan, the merchant cash advance can be a useful way for businesses with a growing platform to monetise their potential, and invest in their growth early. Merchant cash advances are essentially an up-front lump sum, offered in exchange for a percentage of your sales, according to a ‘factor rate’ which constitutes your advance’s interest.
