How to compare business loans

Many businesses considering funding want to compare business loans to see what's available to them. There's lots of ways to do this, which we'll cover, but there are also many other types of lending to think about, which could be a better fit for your business.

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How to compare business loans

Business owners looking for a new source of funding can save money if they compare loans under the following criteria: interest rates, security, term length, speed, and flexibility.

Interest rates 

The first loan comparison criteria that you should look at is interest rates, however, bear in mind that interest rates are just one piece of the pie and the term, flexibility, setup fees etc will drive up the total cost of a loan. In some cases, it is even prudent to choose a business loan with a higher interest rate when the other criteria are favourable. Indeed, the term length and monthly repayment amount are probably more important considerations for the total cost of capital.

Why not try this handy business loan calculator to see how much a typical loan will cost you. Simply enter the amount you wish to borrow, the quoted annual interest rates, and the term length. The calculations are indicative and intended as a guide only and are based on the average rates for a low-risk business. The interest rate will vary depending on the type of business loan, some of which we will cover later in this article

Security

When you begin your journey in searching for new funding options you will quickly realise that the level of risk your business poses to a lender will have a significant impact on the amount that you will be charged and the level of security that you will be required to offer in return. A young business looking for a startup loan or a business with bad credit will find it difficult to get a large unsecured loan without offering valuable assets as security including a personal guarantee.

Similarly, businesses with a short trading history and, or, low turnover might be better suited to invoice finance or a merchant cash advance rather than having to offer up security to access a secured loan. It’s worth touching up on the main differences between a secured and unsecured business loan

Term length

Whether you are looking for working capital funding, to supplement cash flow, or something more long-term, the length of time that you can repay the loan is an important consideration. Mostly, the longer the term and the bigger the amount borrowed, the more interest you’ll end up paying. It’s often worth considering a short-term loan, and then, if necessary, you can apply for an additional lending facility in due course.

It can be worthwhile seeing which lending thresholds different lenders offer as the difference, for example, between £20,000 and £30,000 can be substantial. You might be better off getting a £20,000 loan followed by a £10,000 loan at a later date. This might seem like a lot of work to contact different lenders and compare their lending thresholds and term lengths, so it might save you a bit of time to use a lending platform or a credit broker.

Speed

There are lenders in the market that can supply cash within 24 hours if you have all of the required documentation ready to go. But when comparing business loans you should ask directly how long it will take for your credit facility to reach your bank account.

Factors that affect the speed of approval:

  • Type of lender

  • Type of business loan 

  • The financial health of your business

  • Credit history

Flexibility

Funding Options has a panel of 120+ lenders who can help compare and choose the right loan for your business. If your business has been adversely affected by the pandemic, you can apply for alternative funding to help your business. Have you experienced the relative inflexibility of business loans offered by high street banks? In many cases, traditional lenders are slower than new business loan companies. From our experience, larger loans with longer terms take longer to arrange and secured loans can be slower to set up than unsecured loans. We’ve seen merchant cash advances and small business loans arranged within 24 hours, and with the broad range of different types of loans on offer at the moment, you can navigate the often inflexible lending market.

Types of business loans

For most business owners, the following four types of business loans will work, and the best option will depend on your trading history, balance sheet assets, and cash flow position.

Unsecured business loans

An unsecured business loan offers business owners who need a quick source of cash, but who don’t have valuable assets to use as collateral, a chance to get a loan without the bureaucratic delays concomitant with securities. The market is not experiencing a level of competitiveness not seen before, with great deals on offer. A business owner can secure an unsecured business loan of up to £250,000 and this can be approved in just a couple of days. One of the main advantages of an unsecured business loan is that you won’t require any security.

Benefits of an unsecured loan

  • More flexibility than secured loans

  • Access to faster cash for your business

  • No need to put forward valuable assets

  • No personal guarantee

  • Multi-purpose loans are possible. In comparison to secured loans which are usually fixed, and can only be used for a fixed purpose the purchase of a commercial vehicle

Examples of unsecured loans

  • Working capital finance offers businesses a chance to cover quiet trading periods with two-month loans where the company would pay interest per month.

  • Short-term cash flow loans, with terms that normally last less than two years

  • Merchant cash advances: similar to invoice finance, but taken from future card terminal sales rather than money already owed to your business.

Secured business loans

A business with a demonstrable trading history and asset-heavy balance sheet might favour a secured business loan. This type of lending includes asset finance where loans are secured against property, plant and machinery, and other assets. This collateral significantly reduces the risk posed to the lender, as such,  lower interest rates and better repayment terms can be achieved.  

Business owners who decide to go for a secured loan will usually not need to provide a personal guarantee

Benefits of a secured business loan: 

  • Less stringent credit ratings required

  • Ideal for short-term financing

  • Fixed interest rates

  • Early repayment is possible

  • Often cheaper than unsecured loans 

Working capital loan

An additional loan that business owners can apply for is a working capital loan. This is helpful to cover unexpected cash flow gaps or unexpected expenses, for example, if a machine breaks down. We recommend that you try to find a lender that can offer you the best effective annual interest rate for this short-term loan. You can use a lending platform to quickly compare different lenders’ APRs. 

Revolving credit facility

A revolving credit facility allow a small business to withdraw money and you can repay it, then withdraw money again without the need to apply again for a new lending facility. This makes it one of the most flexible funding options available to business owners. This is often used in place of a business credit card, but it might be handy to have both.

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