If you’re thinking about borrowing money to make the next great leap with your business, it can be hard to know what to look for. Should you choose the latest disruptive technology or might a traditional product be a better fit? And even if you know what product you want — which provider should you approach to secure it?
The first thing to do in this situation is get right down to the basics and decide whether it’s actually a business loan you want, or whether another type of finance might be a better fit for your situation.
For example, if you trade on credit with other businesses then invoice finance is an obvious starting point, whether you choose a traditional or innovative provider. Or perhaps you want something more flexible like a revolving credit facility or business overdraft, to suit an unpredictable or seasonal business.
In other words, do you really mean ‘business loan’, or do you simply want to borrow money?
In the jargon-packed world of business finance, such distinctions are important. Besides, there are more and more niche forms of finance on the market these days — so before you start comparing business loans specifically, it’s a good idea to assess the entire spectrum of finance available to check you’re applying for your best fit.
What security do you have?
This is arguably the most important factor in raising business finance of any kind. Having valuable assets to use as collateral is particularly important for business loans, which fall into two general categories — secured and unsecured — and there are pros and cons to both (although many businesses will only be eligible for one or the other).
Secured loans by definition depend on the value of the asset you use, while unsecured loans require a solid trading history or demonstrable growth potential because the lender’s risk is higher. Another consideration with unsecured loans is that, while they don’t require business assets, they often require a personal guarantee — which effectively involves your personal assets.
Is flexibility important to you?
If so, have a look at the range of overdraft-style business loans and funding options out there. There is a variety of terminology at this end of the market, including ‘revolving credit line’, ‘rolling credit facility’, ‘business cashflow’ and so on, but the common theme is flexibility.
Having funding in place that you can dip into when necessary can be a huge help, particularly if your business is seasonal or difficult to predict. Another potential advantage is that with many of these products, you only pay for what you use. Having said that, for specific projects where you have a pretty good idea of how much you’ll need, the fixed products can be cheaper.
Do you have time to spare?
Flexibility is one area where lenders specialise; speed is another. In fact, ‘faster than the banks’ is a common refrain in alternative finance, and while some claims are more believable than others, there are certainly many products that can get funds in your account within days or even hours of applying.
However, if you’ve got a bit of time to spare you can often find more suitable products elsewhere if you’re prepared to wait for a longer application process. Many of the products designed for speed calculate interest daily, and generally speaking the cheapest type of business loan will have a fixed term, fixed amount, and fixed rate of interest.
Overall, it’s a wise move to get your paperwork ready, whether that’s detailed financials, a business plan, forecasts or the latest filed accounts — then if something happens unexpectedly and you need a loan quickly, you’ll stand a better chance of securing it.
It’s clear that comparing business loans is a tougher job that it seems. Fixed or flexible? Secured or unsecured? Answering these questions will go some way to narrowing down your options, and if you’re struggling to see the wood for the trees, using a business finance matchmaking service could help.
Finally, we often see that businesses applying for one product opt for another — so approach business loans with an open mind, and you’ll stand the best chance of getting the right finance for your business.
By Conrad Ford, chief executive of Funding Options