Types of business finance

Types of business finance

In its report on Small Business Finance Markets for the year ending 2018, the British Business Bank noted that only 1.7% of small and medium-sized businesses had approached a bank for a loan (the lowest number in 8 years).

Even among those businesses that had applied to banks for such a loan, only 43% had any confidence that their application was likely to succeed.

With local banks therefore no longer supporting smaller companies’ demands for finance, what other types of business finance is available?

Equity Finance

When companies are starting and have yet to record much in the way of profits, business loans are likely to prove especially hard to acquire and, so, equity finance is likely to be their way forward.

Equity finance is higher risk, longer-term and, of course, demands the investor taking a share in the equity – or ownership – of your company, and, like as not, also a share in the decision-making, explains the Business Finance Guide.

Debt Finance

Once your company is on its feet, up and running, and with some commercial success to show for itself, debt finance by way of borrowing may become a realistic option.

By borrowing and repaying the funds according to the agreed terms, you are able to retain full ownership in and the independence of your company – but there are still many different types of business finance available when you borrow:

Secured Business Loans

  • lenders may demand some form of security – in the form of business or personal assets – as collateral against a business loan;
  • this is especially the case when the size of the loan means that repayment is spread over the long-term – as a mortgage on a commercial property might be, for example;
  • the extended duration of the loan also means that substantial interest repayments are likely to accrue over the term of the borrowing, when the interest rate may also be variable;

Unsecured Business Loans

  • Unsecured business loans generally come with much shorter loan terms, typically between 3 to 12 months long.
  • As unsecured loans are not secured against assets, they can be faster and simpler to obtain and no formal valuation of assests and security is required.
  • Unsecured loans can be a suitable option for SMB’s looking at borrowing up to £250,000.
  • If a business has urgent funding needs, the fast nature of an unsecured business loan could make this a suitable solution.
  • Business owners with bad personal credit may find unsecured business loans an alternative financing solution if they are unable to get a secured business loan.

Peer to Peer Lending

  • an especially popular alternative source of business finance lies in peer to peer lending or crowdfunding, arranged by an online platform acting as a matchmaker between individuals and organisations looking to invest or lend and businesses wanting to borrow from that pool of resources;
  • you may need to be aware, however, that the Financial Conduct Authority (FCA) has proposed a tighter risk management framework for the activities of peer to peer lenders or crowdfunders – as explained in an article by Norton Rose Fulbright in July of 2018.

Where banks appear to have all but deserted the market for lending to small and medium-sized businesses and the latter have lost confidence in support from that quarter, alternative forms of business finance have emerged to fill the vacuum.

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