For many small businesses today, accessing capital on demand is essential. Whether you need to invest in staff, expand premises, add to your inventory or tide you over through a business slump or boom, credit is king.

The two main options for funding a business come in the form of taking out loans in various forms, or securing investment from third parties. Both have their strengths and their viability depends heavily on how you choose to run your business. In this article we’ll explore the more popular option and most easily accessible: business loans.

Business loan
photo credit: Lendingmemo

There’s often far less investment (pardon the pun) required as they’re designed to keep your business running, not run your business. Tax deduction on interest payments, a plethora of loan types for new to established business and on-tap business advice all weigh in to give them a potential edge over investors for many entrepreneurs.

The most important step for securing capital for investing in your business is figuring out which loan type is best for you, what’s available and what loan term is the best fit. Below, we explore four of the most common types of small business loans available with some notes on subcategories:

Long-Term Loans

Long term loans are the most common type of loan for businesses and often used to secure large amounts of capital for immediate reinvestment in business expansion, corporate acquisitions or refinancing deals. These types of loans are usually repaid on a regular monthly basis. They can be easier to obtain if you have a well-established business, or if you’re a younger business with a strong growth plan.

Commercial Mortgage

Business mortgages are available at your local business bank and typically allow you to borrow from £25,000 with a repayment period of up to25 years. The advantages are that fixed and variable rates allow you to customize your repayments to suit your current business circumstance.

Often, repayments are less than a rental payment on a property, plus you could sublet, grow as you wish, interest payments are tax deductible and, additionally, any positive change in value increases your capital.

Short-Term Loans

A different side of the same coin, short-term loans are typically paid in full at the end of the loan term. These are often used for short-term needs: to build up an inventory, raise cash for accounts payable or to finish small projects that yield quick financial returns.

Invoice Factoring

Invoice factoring is a way of raising capital by selling unpaid invoices to a third party. They will usually pay up to 90% of the value of the invoice in advance with the rest minus fees after the payment is collected from your creditors.

Only available to business-to-business customers who trade on credit terms, cash traders or public retailers may not benefit. With this, you gain the ability to focus on other aspects of the business due to your sales ledger being outsourced.

Your customers will deal only with the third party instead of your business when the debt is collected.

Invoice Discounting

Similar to invoice factoring, you turn unpaid invoices into capital to keep your business in the black. You can usually receive up to 90% of the value of your invoices, but you will have to collect the rest of the debt on your own.

The fees for this are typically lower than for factoring services, so if you can rely on your supplier then could this can be a good option. Any remaining capital is paid, when the invoice is completed, minus fees. With debts collected by yourself, your customers won’t know.

Business line of credit

Lines of Credit

Instead of a lump sum, credit lets a small business access cash as needs arise. Be aware, however, as compounded interest and additional fees can be high. Any temporary shortfalls in income, rather than expansion or business improvements, can be covered.

Business Credit Card

Just like a normal credit card and great for keeping business expenses separate from personal accounts.

A business credit card for you or your staff helps consolidate tax returns and takes out mixing business with personal transactions. Additionally, cards can come with discounts on business goods and services depending on which provider you go with.

Business Account & Overdraft Facility

Accessing an overdraft facility can really help your business stay liquid. Managing cash flow is challenging, so the ability to access capital with ease can give you more freedom.

Typically between one month and a year, overdrafts can be arranged on the phone or online. If the overdraft needs to be extended beyond the 12 months, to become ‘rolling’, an annual review will most likely be required.