How to compare business loan options

If you’re considering a business loan, it’s difficult to know what’s best for your firm. It’s a broad market with lots of products and providers to choose from, and the right option depends on the characteristics of your business.

Here are a few ways to quickly narrow down your options to find the best funding option for your firm.

Business loan, or business finance?

Business owners often use the term ‘business loan’ as a catch-all for the entire market. However, to the lenders themselves, business loans refers to a specific group of products within business finance — an important distinction to be aware of when you’re researching your options. In this context, a business loan will have an amount, a term, an interest rate, and usually fixed monthly payments.

This leads to the first question of whether a business loan is the right option, or whether you’d be better off with another category such as invoice finance or asset finance. For example, if the majority of your revenue comes from customer invoices, invoice finance makes a lot of sense and is perhaps a better choice than a business loan. Equally, if you want funding to purchase machinery, asset finance is designed for this purpose and might work best.

Do you have any security?

Security is central to all kinds of business finance. Business loans fall into two categories, secured and unsecured, and there are a few important differences between them. But before you choose which product you prefer, assess whether you have any assets you could use.

Secured loans are based on things like commercial property, machinery, and vehicles, and the value of the item usually determines the amount you can borrow (for example, up to 75% of the asset’s resale value).

Unsecured loans, on the other hand, don’t require any assets but are based more directly on the strength of your business. Lenders offering unsecured products will want to see strong profits and at least a few years of trading history, and will usually require a personal guarantee too — so your personal credit history comes into play as the director.

The main areas where secured and unsecured loans differ is that secured loans are often cheaper, because with an asset in the background the lender has more confidence about their exposure. On the other hand, unsecured loans are normally faster to arrange, because with no asset involved there’s no need for the lender to take a charge or do a valuation. Also, the amount you can borrow depends on the asset with a secured loan — if your business is strong enough, you might be able to borrow significantly more unsecured.

Do you need flexibility?

If flexibility is important to you, have a look at revolving credit facilities and other flexible products like them. Many of these are like traditional bank overdrafts, so you get a pre-approved credit limit and can dip into the funding when you need to. Usually, aside from the setup cost you’ll only pay for what you use, which means they can sit unused for a few weeks or months, but be accessed immediately when you have a cashflow need.

It’s not just overdraft alternatives that offer flexibility — if your business is suitable, products like merchant cash advances and invoice finance can also be useful for managing cashflow.

How soon do you need the money?

“Faster than the banks” is a phrase you’ll see a lot in alternative finance, and while some claims are more dubious than others, speed is definitely an area where the alternative providers have the edge. Some products like revolving credit facilities make it possible to get funding in your account within hours of approval, and if you need the money fast, these are your best option.

Having said that, if your needs aren’t quite as urgent, it might be worth waiting through a longer application process in order to find a more suitable product. Also, the products advertised with an emphasis on speed are often more expensive, because they calculate interest by the week or day — generally speaking, you’ll get the most favourable rate with a more standard business loan.

Conclusion

There are lots of ways to compare business loans, but these starting points should help you narrow it down quickly. The bottom line is that with such a wide range of loans available, finding the right option depends on your needs.


About the author

Conrad Ford is Chief Executive of Funding Options, recently described by the Telegraph as “the matchmaking website for small businesses and lenders”. Funding Options has been selected by HM Treasury to help businesses find finance when they’re unsuccessful with the major banks, as part of the Bank Referral Scheme that launched in November 2016. @FundingOptions