We are often asked to help clients raise finance for their businesses and to advise them on the suitability of the type of loan they require. It is essential that the loan is suitable both for the business and the purpose the money is being borrowed for.

The following are the main types of loan that you might consider.

Secured or unsecured

A loan can be either secured or unsecured. A loan can be secured on an asset, such as property, machinery, a car or a director's own private residence.

The impact of a secured loan is that if the borrower cannot repay the loan, the lender has the right to sell the asset providing the security and then use the proceeds to repay the loan.

Overdraft

Should be used for short-term occasional borrowing. It is best used to provide short-term finance such as managing the difference in payment times between debtors and creditors. It is not suitable for long-term finance, such as the purchase of a property. If a business has a permanent overdraft, it might be worth considering swapping this for a longer-term loan.

Leases and hire purchase

Usually, these types of loan are used to buy medium-term assets such as cars, machinery and office equipment. Typically they last between one and five years and result in regular monthly payments to repay the loan and interest.

Factoring

This is a method of financing debtors and is ideal for fast-growing businesses. This involves the lender advancing money against every sales invoice made. So, if a business makes a sale of £10,000, for example, the lender might lend

£8,000 the moment the sale is made. The £8,000 plus interest is then repaid when the borrower's customer pays.

Mortgages

These are used to buy long-term assets, such as a property or long-life industrial machinery. The term of the loan will depend on the type of asset being purchased.

The precise loan needed for any business will vary and might involve a mix of some or all of the loans.

If you are wondering which route to take and need some advice, why not give us a call.