Understanding Business Loan Types
Be informed about your finance options
Did you suddenly receive instant knowledge of all the necessary financial jargon as soon as you registered your business?
If not, you’re not alone! There are so many new words and concepts that come part and parcel of being a business owner, and it can seem like a whole new world. The finance aspect in particular comes with an array of terms that might seem unintelligible to those inexperienced in the sector (and that’s the majority of us!).
To help you demystify some of the terms specific to business loans, we spoke to Jemma at Spinach, a business loan brokering service that helps SMEs get the very best loan terms, get funded, and get ahead. Read on to get the lowdown on different types of loans and how they might benefit you.
Business loan types explained
Working capital loan
A working capital is a lump sum of money that keeps your cash flow moving. The amount can fluctuate within the month to help you bridge the difference between your outbound and incoming payments. A loan for this purpose may be a line of credit or overdraft facility where you only pay interest on the amount you are using.
Ideally, a loan for this purpose would be no more than 5 or 10% of your turnover. Otherwise, you are unlikely to fully repay it from cash flow and it will be expensive.
Asset finance
Asset finance funds the assets of the business. This may mean vehicles, equipment, plant, machinery, and more. In some cases it may be for the vehicle and all the equipment you need to put another team member on the road. It may be upgrading equipment to fulfill a new contract.
If you are taking on an asset for your business, this is the most competitive type of business loan and you should be able to achieve good loan terms and rates because it’s secured by the asset itself.
Secured vs unsecured business loans
All business loans require a personal guarantee from the owners of the company. However, they might be classified as secured or unsecured, and the difference is important to understand. With a secured loan, the lender takes a security interest over your property or business assets—i.e, the loan is secured against those things (like a mortgage is secured against a property). This means that the lender can offer longer terms, lower interest rates, and possibly a larger amount.
An unsecured loan means that you are only offering a personal guarantee; the lender can’t register their interest against any assets. Because of the increased risk to the lender, they will offer shorter loan terms, and higher interest rates—but you will have more flexibility to buy and sell assets as needed.
Be sure to run these types of loans past your accountant to determine the best option!
Bridging loans
A bridging loan is so named because it bridges a gap in your finances. This is often used in home purchases; maybe you found a property you want to buy and need to complete the sale before your other property sells.
In a business context, it could be that you need to take on an upgraded asset while you repair another one for sale, or you are buying a business and waiting for an asset to sell to pay for it. Whatever the case may be, a bridging loan can be the difference between completing a transaction or missing it entirely.
The Spinach financiers take a ‘big picture’ approach to your goals. So if there is something you are trying to achieve and think a bridging loan could help, get in touch.
Term loan
Earlier we discussed a revolving credit (working capital loan) where the full amount of funds are available to you to use and repay as needed. The alternative to that is a term loan where you borrow a sum up front and repay it incrementally over the life of the loan, the same way you do your mortgage or car loan. You would use this type of loan when:
Consolidating multiple loans into one simple repayment.
Buying an asset.
Taking on working capital to get through a quiet period like Christmas, or between contracts.
Buying a new business
And more! A term loan is a broad category that can be secured or unsecured depending on the situation. It just refers to borrowing a set amount and paying it back in regular agreed-upon installments.
As you can see, there are a lot of ways to approach the funding of your business goals—and this is far from a deep dive! The Spinach team are specialist business loan brokers who take the time to ask the questions that uncover what type of loan would solve your requirements and then get to work to try and make that happen.
If you’d like to discuss what options might be available to your business, then reach out to them on their website or at 0800774622 (or call Jemma directly on 021 358 433).
