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Things to Consider When Looking for Business Finance

21 June 2023

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.

How much do you need to borrow?

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:

  • Insurance costs
  • Training

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.

How much can you afford to borrow?

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:

  • Do you owe money on any other loans that would affect your most recent venture?
  • Are you owed money from suppliers or customers that will determine your affordability?
  • Is your business financially stable?

Compare interest rates. Fixed or variable?

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

Fixed interest rate loans:

  • Are predictable and stable. Your monthly payments will always remain the same regardless of how market interest rates change. This does mean that depending on how the market interest rates change, you could be paying much more or much less than if you were on a variable rate. The Bank of England has seen multiple rises over the past couple of years. Just a couple of years ago, in March 2020 the base rate was at an all time low of just 0.1%. Fast forward to 2023 and we’ve just seen rates increase (at the time of writing) to 4.5%. Therefore a fixed-interest rate loan offers greater peace of mind against future fluctuations
  • May incur additional fees if you want to change terms or exit the loan earlier than planned
  • Are generally more expensive over the life of the loan than variable loans

Variable interest rate loans:

  • Typically have a lower interest rate than fixed loans
  • Often have initial incentives such as low introductory rates
  • Can be unpredictable. If you want to know exactly how much you are going to be paying out and want to be able to plan future cash flow, this may be difficult due to the potential for changing rates
  • Are a bigger risk if you are already at your repayment capacity. Adding a variable repayment could put your business in financial difficulty

Do you need a short-term or long-term loan?

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.

  • Repayments are typically made over a short period of up to three year period and are best suited for smaller loan values
  • They are quick and simple to apply for with quick-release funds
  • Applying for a short-term loan can be a reactive decision due to its quick and easy process and some loans may need some more thought. So you may want to consider other forms of business loans as well

In contrast:

  • Long-term loans can result in lower monthly repayments which can make cash flow more manageable

Secured or unsecured finance?

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:

  • Commercial Mortgages
  • Vehicle finance
  • Secured credit cards

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.

Does the lender have experience in your industry?

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 repayment options

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:

  • Repayment holidays
  • No early repayment charges
  • The option to pay off the loan early if you have the means to do so

Will you need access to “top-up” finance?

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:

  • An existing relationship with their lender
  • A good credit score
  • Repayment ability

How quickly do you need the money?

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:

  • Simple and quick application
  • Fast approval times
  • Quick release funds

Understand your current gearing ratio

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:

  • Lower than 25% is considered low-risk by investors and lenders
  • 25% - 50% is considered normal for well-established companies
  • Higher than 50% is considered high risk and the business could be more susceptible to loan default

Consider potential external risks before signing on the dotted line

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.

Unsure which is the best business finance solution for you?

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 take the time to really get to know your business so that we can provide you with the best advice possible
  • We provide you with all the information you need
  • We work with over 100 reputable lenders
  • We will help you every step of the way, from application right to the end of your repayment period
  • We have tips on how to secure your business loan and helpful articles on how to check your business credit score

We like to build relationships with our clients so get in touch today to get started!

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Aintu Ltd T/A Union Business Finance is an independent Asset finance broker not a lender, as such we can introduce you to a wide range of finance providers depending on your requirements and circumstances. We are not independent financial advisors and so are unable to provide you with independent financial advice. Aintu Ltd T/A Union Business Finance will receive payment(s) or other benefit from the finance provider if you decide to enter into an agreement with them. Aintu Ltd T/A Union Business Finance is an appointed representative of AFS Compliance Ltd which is authorised and regulated by the Financial Conduct Authority under number 625035. Aintu Ltd T/A Union Business Finance aims to provide our customers with the highest standards of service. If our service fails to meet your requirements and you would like to report a complaint; please click on the link below;


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