Taking on short-term debt is an often indispensable means of helping SME businesses grow and weather unplanned demands on cash flow. And in 2017, borrowing is projected to rise. The latest Zurich SME Risk Index shows SMEs plan to borrow an average of £41,770 – a 22% increase on 2016.
With hundreds of business banking providers and business products and services, independent SME website Business Banking Insight helps guide you through the maze.
Business loans, overdrafts or business asset finance. Which one’s right for you?
While invoice finance and merchant cash advances (mainly for retailers) are additional options, we focus here on the three most common options:
Overdrafts. You’re likely to have one as part of your business current account already. They’re best suited to short-term borrowing and emergencies. Spend up to your authorised limit and you only pay interest on the amount you borrow. Exceed your agreed amount, however, and you’ll pay far more than for a business loan.
Business Asset finance. This is ideal for acquiring larger items of equipment for your SME business, without tying up your precious capital. You pay the provider regular payments for using your equipment – without ever buying or owning it outright. There can be tax advantages in this route too, whether you choose to lease or hire purchase.
Business Loans. Here you borrow a lump sum over an agreed period, with fixed monthly payments. Business loans are well suited to supporting cash flow needs – or fueling expansion plans. The amounts you can borrow are often greater than for a business loan – and there’s far less risk of them being called in, unless you’re in breach of your agreement.
Secured or unsecured business loans?
If a business loan best suits your needs, your next choice is between an unsecured or secured loan. The second option is usually cheaper as it means securing it against business assets such as property and equipment. Qualifying for an unsecured business loan will be based on your ability to pay, your forecasts, profitability, and your business credit history. You don’t need to have tangible assets to qualify – and you’re likely to get your loan faster, as there are no valuations on your assets to be made.
Are fixed or floating interest rates better for my business?
A fixed rate will, of course, give you certainty of cost for the entire duration of the business loan. A floating rate may be lower at the outset, but you could find your loan rate on the rise with little option to move from your agreed terms without incurring charges.
Shop around for best value and service in business loans and business asset finance.
While going to your existing business banking provider may be convenient, you’re likely to get a better deal by talking to one of the growing numbers of new challenger business banks, online lenders, credit unions, peer-to-peer lenders and specialist providers.
5 additional factors to bear in mind when looking for a business loan
- Cost. Look beyond the rate and include any arrangement or additional charges into the cost of comparing banking providers.
- The amount. Borrow more than you need and you’ll end up paying for that extra amount for years.
- Flexibility. Some business banking products have more flex built in. This may cost a little more, but work out better for you in the long term. Especially if your business is more volatile or seasonal by nature.
- Early repayment. Check if you can repay early without penalty. Doing so will allow you to reduce costs should cash flow improve.
- Compare. Check out the business banking provider experiences of other SMEs.