Types of Loans

Understanding the types of business loans

There are a variety of business loans and funding solutions available for businesses in the UK. Understanding which type of loan is best for your business can be complicated and confusing. At Finimpact, we’ve simplified the process by matching you with the best solution for your business. Our network of lenders offer: Revenue advance, unsecured business loans, asset finance, property loans, trade finance, invoice finance, peer-to-peer loans, merchant cash advances and more.

If you’d like to learn more about the different types of funding solutions, you can read about each of them below:

Revenue Advance

A Revenue Advance or Merchant Cash Advance is a type of funding solution that provides businesses with flexible terms, where they repay the funding based on future sales. With a revenue advance there is no fixed interest on the loan, instead, the business pays an agreed upon percentage of future sales until the loan (plus interest) is repaid.

In a typical scenario, businesses are normally able to borrow up to three times their average monthly revenue.

What sort of business might use a Revenue Advance?

This type of funding is especially useful for growing businesses, allowing them the flexibility to maintain healthy cash-flow while returning the loan as their sales grow.

The business does not have to worry about any temporary slowdown in sales because they pay a fixed percentage of the revenue. This is in contrast to a traditional loan which would have a fixed payment schedule and would need to be repaid even when revenue slows down.

Unsecured Business Loan

An unsecured business loan is a type of funding solution that does not require a personal or business asset to be used as collateral.  This type of loan is given to a business based on the healthy financials of the business and a high credit score.

Because unsecured business loans don’t require a security or assets as collateral, there is a higher risk for the lenders that the loan will not get paid back. Therefore the interest rates will normally be higher than for secured loans.

The amount of the loan and what it is used for can determine the rate of the interest. Although unsecured loans tend to have higher interest rates, they can still be lower than other funding solutions

 What sort of business might use an Unsecured Business loan?

A business with limited assets or one that does not want to provide collateral may be able to obtain an unsecured loan. The business would normally be subject to a credit check and would, therefore, have to be able to meet a strong level of credit-worthiness. In some situations, a personal guarantee may also be required from the company’s owners or directors.

 

Asset based finance

Asset based finance is a method of providing a business loan that is secured by an asset. This means, that if the loan is not repaid, the asset is used as collateral and can be taken by the lender. Assets can be accounts receivable, inventory, machinery, equipment and/or real estate.  Asset based funding is a great solution for new companies for refinancing existing loans, financing growth, mergers, and acquisitions.

Asset based finance can also be used to generate cash in order to purchase a new asset, where the value of the asset is used as security for the loan.

What sort of business might use Asset Based finance?

Asset based finance (or collateralized loans as they are also known) is a less expensive loan to take because the lender has some security if the loan is not repaid. A business with assets of value may find this a useful way to raise cash.

Property loans / Commercial mortgages

This is simply a type of asset based finance, where the loan takes the form of a property loan or commercial mortgage that is secured (or collateralized) by a property that is not a primary residence.

 What sort of business might use a Property loan or commercial mortgage?

This could be a business that owns or invests in property and can secure financing against the value of the property they own, or for purchasing additional property.

 

Trade Finance

Trade finance is a financing solution that helps businesses involved in the movement of goods in transit, either domestically or internationally. It helps finance a business to purchase goods from a supplier in order to sell the goods onwards to the end customer. Trade financing is usually a short term loan that occurs over the period of the trade cycle of the goods.

The majority of trade finance helps businesses in global trade to facilitate the finance of imports from overseas. It can happen in several forms including: pre-shipment finance, post-shipment finance, direct payments to suppliers, loans, revolvers and a letter of credit.

 What sort of business might use Trade Finance?

 A business that has limited funds or that does not have an established long-term relationship with a supplier may find it difficult to provide funds to pay up-front for goods that it plans to sell in the UK.

Trade finance is often a short-term loan that bridges the gap between paying for the goods and the time it takes for the company to sell on those goods in the UK market.

 

Invoice Financing

Invoice financing is a form of funding where a business gets funding by selling its unpaid invoices to a company who will collect the money on the invoices themselves. There are two main types of invoice financing: Invoice Factoring and Invoice Discounting.

Invoice Factoring or debt factoring involves the financier managing the sales ledger and collecting the unpaid invoices. The financing company will buy the debt owed by the customers, purchasing the invoices at a discount and with fees, and claiming the full amount from the customer.

Invoice Discounting is when the financier lends a business money against unpaid invoices in return for which the business pays a fee. The collection of debt and unpaid invoices remains with the business. Once the customers pay their invoice, the money goes to the financier. This then allows the business to borrow additional funding on invoices from new sales. With invoice discounting the business’s customers do not know that their invoices were sold to a third party.

What sort of business might use Invoice Funding?

Invoice financing is a recommended form of funding for businesses that are experiencing cashflow problems due to debt from outstanding incoming invoices. A business in this situation could sell their invoices to a financing company and receive up to 90% of the value of the invoice before the customer settles it. This can be helpful (or even essential) for businesses which are experiencing a cash flow downturn, perhaps due to seasonal or other reasons. 

 

 

Equity Crowd Funding

Equity crowd funding enables individuals and accredited investors to invest in private businesses and startups in exchange for shares in the business or a promise for a share of future returns.

It is similar to peer to peer lending, in that it takes place on public websites, but investors are not making loans to a company, rather they are buying some equity. As a result investors or shareholders have the potential to enjoy the success of the business but also can risk losing their investment should the business fail.

What sort of business might use equity crowd funding?

A new business that has a new creative idea or needs additional funding, may be happy to sell equity (and therefore some of the potential future profits) rather than taking out a loan. Though if the crowd funding does not generate enough investor interest, the business may have to turn to more traditional business lending options.

Peer to Peer Loans

Peer to peer lending, also known as “social lending” or “crowd funding”, is a relatively new form of funding that takes place through online platforms, and allows individuals and companies to borrow and lend money to one other. P2P lending, as it is often called, is a way to cut traditional financial intermediaries such as banks out of the process by allowing borrowers and lenders to interact directly with each other.

The funding provided is usually an unsecured loan.

For a potential borrower, they would agree to a credit check and have to disclose financial information as well as details about their business and the reasons for the loan.

Lenders diversify by investing in multiple businesses to mitigate the risk of any one borrower defaulting on their loan.

What sort of business might use P2P lending?

If a business is prepared to disclose its financial information and investment plans to multiple potential investors, then peer to peer lending can be a way of borrowing money that compares favourably to unsecured loans borrowed from a traditional financial intermediary such as a bank.

Lease finance

Lease finance is a very popular financing option in the business world. The borrower (i.e. the business) will choose an asset such as equipment, software, etc. which will be purchased by a lender. The business will then make a regular payment, often monthly, to the lender during the period of the lease throughout which the business has use of the asset.

Depending on the contract, the business may have the option to acquire the asset at the end of the lease period.

Advantages to the business include the fact that assets can be paid for from the revenue they produce as well as the fact that it does not tie up cash which can be used for other purposes. Also, lease contracts will often be longer than loans typically available from banks.

What sort of business might use lease financing?

 Leasing an asset can save a business the initial cost of buying it outright and may also give the business access to a higher standard of equipment than they would have been able to purchase themselves. Though the business needs to consider that over the whole period of the lease contract it can be more expensive than buying the asset outright.

Merchant Cash Advance

A Merchant Cash Advance, also known as Revenue Advance, is a type of funding solution that provides businesses with flexible terms, where they repay the funding based on future sales. With a revenue advance there is no fixed interest on the loan, instead, the business pays an agreed upon percentage of future sales until the loan (plus interest) is repaid.

In a typical scenario, businesses are normally able to borrow up to three times their average monthly revenue.

What sort of business might use a Merchant Cash Advance?

This type of funding is especially useful for growing businesses, allowing them the flexibility to maintain healthy cash-flow while returning the loan as their sales grow.

The business does not have to worry about any temporary slowdown in sales because they pay a fixed percentage of the revenue. This is in contrast to a traditional loan which would have a fixed payment schedule and would need to be repaid even when revenue slows down.