Choosing the right type of business finance can be overwhelming if you don’t know where to start. There are many different types available so how do you know which one is right for you and your company?
In this article, we will talk you through the top factors to consider when borrowing money and point you in the right direction for the loan you require. By not considering the factors mentioned below, you could risk your application being rejected, paying more than you need to or putting your company under undue pressure for longer than you need to.
Before you decide what type of business finance to choose, you must first know how much you need to borrow as this will dictate what kind of loan is right for you. Make sure you have carefully considered exactly what you need and what you need it for. If you are looking to borrow money for a specific project, it would be worth getting quotes to find out exactly how much need.
If for example, you need to buy a piece of plant machinery, do you also need to borrow money for the annual maintenance agreement? There could also be other considerations such as:
Sometimes you may be able to borrow slightly more than the cost of the asset alone and this can help spread costs and mitigate cash flow issues if budgets are tight.
You also want to make sure that you are not borrowing more than you need as you would then be paying interest on an amount that wasn’t entirely necessary. It is important to find the balance between borrowing enough and not borrowing too much.
There are several factors to consider when deciding on how much you can afford to borrow and it is worth noting that how much you need and how much you can afford are not always compatible.
You don’t want to overstretch your finances and borrow more than you can afford to pay back and it is always good to plan for unexpected expenses. Consider the current financial state of your business and potential term issues in the market and consider these factors:
When considering a fixed or variable interest rate, there are a few comparisons to be made between the two that will help you decide which one is right for you
If you need funds quickly for your business venture and are looking for a simple application process with high approval rates, then a short-term business loan is for you.
A secured loan is secured against an asset that you own such as your premises or your commercial vehicle. If the borrower defaults on repayments, those items could be repossessed which makes them less risky to the lender. Examples of secured loans are:
An unsecured loan isn’t secured to anything. Because unsecured loans are viewed as a riskier option to lenders, they usually have stricter application processes and higher interest rates.
For more information read our guide to unsecured business loans.
If a lender has knowledge of your industry then they will be aware of any unusual trends or fluctuations which might scare off other lenders who don’t understand how that industry works.
For example, if you want to buy a tractor, you would benefit hugely from borrowing from a company that understands the farming industry and who has specific loans for the agriculture sector.
Flexible repayments provide you with the ability to adjust your repayments to support changes in your requirements or help with cash flow issues. This may include:
A top-up loan is a new loan that takes what is left to pay of an existing loan and adds an additional amount to it if the borrower requires more than they initially borrowed. The amount the borrower then has to repay is a combination of both loans. The advantage of this is that the borrower doesn’t have to apply for a new loan which saves time, admin and accounting tasks.
Top-up loans are available to borrowers who have:
As a business owner, we understand that every minute of your time is precious and that sometimes funds are required quickly due to a shortfall in cash flow or a time-sensitive opportunity that may have arisen. If you’re looking for emergency funding as fast as possible then an instant business loan is for you.
Sometimes an instant cash injection is exactly what is needed and we have got that covered for you with:
The gearing ratio indicates the financial risk associated with a company. The best way to calculate it is by using the debt-to-equity measure which means dividing the business’s debt by the company's equity. This figure can then be converted to a percentage by multiplying it by 100.
The guidelines to determine whether or not you have a good or bad gearing ratio are:
Before committing to any kind of business loan, it is important to consider any potential risks either within your company or externally such as Brexit and rising interest rates. This is to ensure that you can afford the ongoing payments. If you are happy that you have considered all the factors that come with applying for business finance, that is the time to proceed on to the next step.
As a business finance broker, Union Business Finance can help inform businesses as to what options are available and more importantly, what loan would be best for your company and your circumstances.
We like to build relationships with our clients so get in touch today to get started!