Consider the different types of business loans



Consider the different types of business loans

posted by: Jason Hulott

Here at Cubefunder, we are very aware that the array of different types of loans and the terminology associated with them can be baffling at a first glance.

In a brief piece of this nature, we cannot outline every single product and its implications! However, we will try to summarise here some of the main categories and the principles that differentiate them.

Debt finance

There are a number of business loans that come under this general heading. Very generally speaking, this type of finance involves borrowing a sum of money and re-paying it back over time in an agreed repayment schedule.

It’s called debt finance because it adds to the debt of the company. In other words, your company now owes someone else a specific sum of money.

These are sometimes also just called “business loans”. The terms and conditions may vary and these types of products may or may not require security (ours do not).

These products, such as the traditional bank loan are very familiar. Our proposition is different from those conventional loans in terms of the way we identify the funding and particularly in our speed of response.

Equity finance

This is fundamentally different.

It essentially means that you have given the lender or lenders a share of your business in one way or another. Typically, that is in the form of real shares (or other legal instrument) in your business and in return, the lenders will expect a percentage of your profits and very possibly a significant say in how you run your affairs.

This type of finance is more commonly found in situations such as new companies who are seeking expansion funding but who perhaps lack the trading history sufficient to justify some other forms of loan.

Asset re-finance

This is occasionally used in situations where a company wishes to raise capital and the lender asks for some form of security against it.

For example, in a situation where a company owns property that has equity in it (defined as being the difference between the property’s realistic market value and any outstanding finance on it, such as a mortgage) they can borrow against that.

Trade finance

This is a form of lending that is most commonly associated with making credit available to companies that are importing and exporting.

This is typically seen as a method of smoothing the “peaks and troughs” of income versus expenditure in what can be the rather volatile and unpredictable cash flow situation surrounding overseas trade.

Invoice finance

In a sense, this is linked to asset finance in that it sees your outstanding invoices as an asset you can borrow against.

Typically, the funds provider will advance you a figure, perhaps around 85%, of your existing outstanding and unpaid invoices. They will then receive payment of those invoices and pay the balance to you once received, typically minus their charges and commissions.

Unlicensed or non-specific lending

There are some companies and individuals who operate on the margins of regulation to offer unlicensed loans.

Typically these are for more modest sums but extreme caution is required. The interest charges may be punitive and extensive security is often demanded.

It is strongly recommended that you only approach fully licensed and regulated funds providers or funds provider intermediaries.