Bank loans
A bank loan may be obtained from a bank and may be either secured or unsecured. For secured loans, banks will require collateral, which may be lost if repayments are not made. The bank will probably wish to see the business’s accounts, balance sheet and business plan, as well as studying the principals’ credit histories. Many smaller businesses are now however turning towards Alternative Finance Providers, especially in the case of smaller firms.
Loans from credit unions may be referred to as bank loans as well. Business loans from credit unions received the second highest level of satisfaction from borrowers after loans from small banks.
Mezzanine finance
Mezzanine finance effectively secures a company’s debt on its equity, allowing the lender to claim part-ownership of the business if the loan is not paid back on time and in full. This allows the business to borrow without putting up other collateral, but risks diluting the principals’ equity share in case of default.
Asset-based financing
Once considered the finance option of last resort, asset-based lending has become a popular choice for small businesses lacking the credit rating or track record to qualify for other forms of finance. In simple terms, it involves borrowing against one of the company’s assets, with the lender focusing on the quality of the collateral rather than the credit rating and prospects of the company. A business may borrow against several different types of asset, including premises, plant, stock or receivables.
Invoice financing
In recent years, it has become increasingly difficult for SMEs to obtain traditional finance from banks. Alternative options are invoice discounting or factoring, whereby the company borrows against its outstanding invoices, with the ability to obtain funds as soon as new invoices are created. It is often questioned which option is best for your business – factoring or discounting – and the answer depends on how the business wants to be perceived by customers. With factoring, the finance company charges interest on the loan until the invoice is paid, as well as fees, and the finance company takes ownership of the debtor ledger and uses its own credit control team to secure payment. With invoice discounting, the business maintains control of its own ledger and chases debts itself.
Microloans business loans
Smaller loans, usually for loan amounts of £10,000 or less, are referred to as “microloans.” Banks are less likely to make these loans than alternative lenders. When they do, the decision is usually based on the personal credit score of the business and/or the business credit score.
Business cash advances and cash flow loans
There has been a rise in the number of online lenders offering small business loans. The increase in application levels for big and smaller banks has stayed relatively stable in the last number of years, moving just a few percent down or up. Application numbers for internet loan providers, on the other hand, have experienced a remarkable surge upward with an raise of thirteen percent in merely 2 years!. Nonbank lenders that make small business loans have doubled their outstanding portfolio balance every year since 2000. Some online originate loans from their own capital. Others may use a “marketplace” model, in which they match borrowers to loan products from a variety of lenders. Popular business loan products that online lenders offer include: term loans, lines of credit and merchant cash advance. Others use crowdfunding platforms that allow businesses to raise capital from a wide variety of sources.
Business loans may be either secured or unsecured. With a secured loan, the borrower pledges an asset (such as plant, equipment, stock or vehicles) against the debt. If the debt is not repaid, the lender may claim the secured asset. Unsecured loans do not have collateral, though the lender will have a general claim on the borrower’s assets if repayment is not made. Should the borrower become bankrupt, unsecured creditors will usually realise a smaller proportion of their claims than secured creditors. As a consequence, secured loans will generally attract a lower rate of interest.
Lenders that make business loans often use a registered charge to alert other creditors of their security interest in the property of the business. Registered charge may be placed against specific assets, or a blanket charge secures interest in all property. Registered charges may affect the business credit score and may make it more difficult to obtain subsequent financing.
Many lenders require principals with 20% or greater ownership in the business to provide a personal guarantee. The personal guarantee allows the lender to attempt to collect the debt from the personal assets of the guarantors. Small business lenders may waive the personal guarantee requirement if the business has strong business credit scores and revenue.