Before you apply for a business loan it’s important to understand the types of financial products that are available.
[Read related blogs: What You Need to Secure Funding For Your Business; How To Apply For A Business Loan]
Loans
Loans can vary in the amount of the loan, the terms (or length of repayment), interest rate, interest type (fixed or variable), security, and fees. Each loan is completely unique so be sure to do your research and examine each loan carefully before you apply.
Overdraft Facility
This is when you link your business account with an overdraft limit that authorizes you in case you have an overage. You’ll need a credit check and to make sure your business is viable before getting approved. This product can provide you with working capital for your business before you receive income. But it shouldn’t be used for long-term financing or big purchases.
Fully Drawn Advance
This product provides upfront funding for an investment that’s long-term. This might include business equipment. This product will usually allow you to fix your interest rate for a period of time while fully drawing the amount needed. This allows you to feel certain and secure in the payments that you’ll be making in the future.
Rent To Buy
This is when you can get what you need for your business with an initial deposit and then regular payments. It may be more expensive than paying fully upfront. But it’s a good option for new equipment or furniture when there is an urgent need.
Commercial Hire-purchase
This product is when you purchase a good with a deposit upfront. You then pay off the remainder with instalments and interest charges. You can often reduce the interest by repaying a larger portion as your final payment. This type of larger final payment is also called a “balloon” payment.
Line of Credit
This product provides your business with access to funds up to an approved limit. It offers a great deal of flexibility.
Bill of Exchange
Also known as a “commercial bill” this product is for short-term funding such as inventory. You get a specific amount upfront and you make regular interest payments. The rest is due at the end of the loan term. Another similar loan type is Chattel mortgage which gives you ownership over the asset from the beginning.
Factoring
This is also called accounts receivable finance or debtors finance. This is when a company buys any outstanding financial balances owed to your business, at a discount. The other company then chases down the debts and collects. This can allow you to collect cash and remove the worry of chasing after old unpaid debts to your business. But the discounts are often cheap and it can be an expensive form of financing.
Invoice Finance
This is similar to factoring except that you are not selling the debt to the other company. Instead, the debts stay with your company and the other business chases them down and gets a percentage.