A Look Into The Types of Business Finance Options


Businesses have been crippling ever since the onset of this pandemic and the UK Government imposing lockdown measures. Majority of these businesses even didn’t have an online presence to continue selling despite the pandemic. Their financials are in doldrums, and many of them are looking for financing options as the lockdown measures have been relaxing gradually and situation returning to normalcy.

This blog will introduce you to specific loan types available for businesses in the UK.

There are a plethora of direct lenders in the UK offering Christmas loans. These are no guarantor unsecured loans which mean the borrower would not have to pledge any asset as collateral against the loan and also would not have to produce any guarantor to represent him.

These loans have an instant decision which means the approval or rejection decision on the loan is given hours after submitting the loan application.

Let’s now look at some of the business finance options available in the UK:

Short-Term Business Loans

These loans are usually for meeting the working capital needs of companies. These loans are short-term in nature with quick and flexible repayment options. The loan’s tenor usually ranges between a few weeks to almost a year. The ceiling of the loan amount in this type of business finance is £2,00,000. Due to shorter tenor of these loans, the interest rates on them are comparatively on the higher side.

Peer-to-Peer Business Loans

These loans are not taken from established commercial banks but rather from a pool of investors. These investors lend to online peer-to-peer lending platforms which in turn lends to corporate borrowers. The terms and conditions on these loans are less strict when compared to conventional loans taken from banks. However, the rate of interest could be higher in a few cases if you have a bad credit profile.

Invoice Financing

These are usually one click loans which are granted against the outstanding invoices which the business owes from its customers. The lenders will buy these invoices and give you the loan of a similar amount.

Invoice financing is of two types: Invoice Factoring and Invoice Discounting.

The former is where the lender collects money from your customer directly, and the latter is when you return the loan amount when you get money from your customers against the outstanding invoices. There could be a discount charge or service charge on these loans which are tantamount to interest rates charged in other loans.

Cash Advance Loans

This is an interesting financing option wherein you ask the lender to give you loan against the future debt of your business or its credit card sales. Computing precise interest rates for these loans is a tricky task for the lenders as the repayment amount is dependent on your business’s card taking. So, lenders prefer charging a fee instead of quoting an interest rate.

Start-up Loans

Start-ups and new businesses are rejected by banks owing to their weak financials and no history. The start-up loans are for such start-ups and new businesses to get the initial funding. Some of these loans are Government backed which enhances their credibility. These are unsecured and no guarantor loans for which you did not have to submit the financial statements of your business.

VC/PE Funding

There are many wealthy venture capital and private equity investors who lend to innovative businesses and start-ups. In return for these loans, they take a position on the company’s board. They might also ask for an equity stake in the company.Thus this funding can be at the cost of equity dilution.

Also, decision making will now involve these investors as they are stakeholders now. The upside of this funding option is that these investors will give you a higher amount of money.

Unsecured Loans

These are loans that are not backed by any asset or security and are thus perfect for start-ups, small and mid-size businesses who find it hard to give collaterals. However, despite them being unsecured, the loan amount is usually lower compared to other traditional loans. Additionally, the interest rates on these loans are relatively higher as the risk involved in lending is higher here.

Asset Financing

Lenders give these loans, and in return, they get the company’s assets. It can be computers, motor vehicles, machinery, plant, or any other equipment. The loan amount given to the borrower is secured against these assets. There are loan agreements here which have all the terms and conditions listed in them. These loans are usually taken to buy new machinery or any equipment required for business operations. 

Business Overdraft

Another good financing option for short-term requirement of money in your business. In this mode of financing, the lender gives you an overdraft (OD) limit under a Current Account which business has with the bank.

The business can make payments from this account even if they have insufficient balance in their account. The additional amount over and above the balance of the current account is the loan which the business has taken from the bank. This OD limit can be increased if the borrower is respecting the terms and conditions.