Your borrowing choices explained

Read time: 7 mins Date added: 07/10/2024

Explore the different borrowing options available to support your small business.

Business lending can give you a safety net for difficult times or provide funds for growth. Understanding all your borrowing options before applying for financial help is vital, regardless of whether you’re starting out or have been trading for some time.

The benefits of business borrowing include having more flexibility regarding planning and being able to invest in the vehicles, machinery and equipment you need to be competitive in your sector. Lending can also give you a buffer to deal with any unexpected financial bumps in the road.

In this guide, we explore the different borrowing choices and their role in helping your business prosper. 

On this page:​

Should I apply for a business loan?

There are a few things you need to consider before making a business loan application.

 

Which type of small business loan should I apply for?

In addition to your loan amount and repayment terms, you should also consider the best type of loan for your small business.

 

Fixed or variable interest rate?

Choosing a fixed rate business loan means you’ll know exactly how much your monthly repayments will be. With a variable interest rate loan, your repayments could fluctuate in line with Bank of England base interest rate changes.

 

Secured or unsecured loan?

Secured loans need a valuable asset to be put up as collateral in case you can’t make the repayments. Unsecured loans don’t need this commitment and are based on your business's credit rating.

Secured loans usually come with lower interest rates due to the reduced risk posed to the lender.

 

How much should I borrow?

You might want to invest in infrastructure or new employees to get your business up and running or fund your growth plans.

The amount you can borrow for a small business loan is dependent on several different factors, including:

 

  • The details in your company accounts.
  • Your business credit score. 
  • The amount of time you’ve been trading.

 

It’s important to carefully consider how much to borrow and have a clear plan on how you’ll invest it in moving your business forward.

 

The affordability of repayments

Once you’ve decided how much you’d like to borrow, the next step is to look at the repayment terms. Here are three vital things to consider: 

 

  • Will the repayment schedule strain your business finances, or does it look manageable? 
  • If you’re using the loan to grow your business by investing in more staff, for example, have you thought about the associated costs like tax and National Insurance? 
  • Would you still be able to afford loan repayments if you lost your biggest customer? 

 

Find out more about Business Loans.

Business Overdrafts in brief

Bad weather, late payments and unexpected repair bills can all impact your cash flow. When things don’t go to plan, it’s good to have a financial safety net to fall back on. Here’s a look at how Business Overdrafts work and their main benefits. 

 

  • Flexibility - your overdraft can be used multiple times, unlike a business loan. For example, if you have temporary cash flow issues, your Business Overdraft can act as a buffer until you receive funds and repay it. You can then use it again in the future if needed.
  • One less thing to worry about - a Business Overdraft can also provide you with peace of mind. Being able to react quickly to circumstances out of your control is essential and having an overdraft in place means you can adapt when your cash flow is negatively affected. 

 

It’s also worth bearing in mind the interest on your Business Overdraft will vary as the Bank of England base rate changes.
 

Find out more about Business Overdrafts.

Business Credit and Charge Cards explained

Our Business Credit and Charge Cards can benefit you and your employees in several ways. As your business and team expand, you’ll likely have new things to deal with that will take more of your time away from day-to-day activities. Here’s a quick summary of how our business cards work. 

 

Easy expenses tracking 

Our Business Charge Cards suit well-established small businesses and those growing rapidly. Here’s what to expect: 

 

  • Issue unlimited Charge Cards, each with its own spending limit. 
  • Make monthly repayments from your business current account via direct debit. 

 

And with online tracking, the process of reconciling your expenses is hassle-free. 

 

Reducing cash flow worries 

Keeping on top of expenses can become more time-consuming as your business expands and you grow your team. A Business Credit Card can help by:

 

  • Making it easy for employees to pay for items on work trips. 
  • Relieving cash flow problems when you don’t have a Business Overdraft in place. 

 

The interest rate on all Business Credit Cards is variable and can go up or down in line with the Bank of England base rate. 

 

Find out more about Business Cards.

How does a Merchant Cash Advance work?

A Merchant Cash Advance gives you access to money which is repaid from an agreed percentage of your future card sales. It’s only available to Cardnet customers and is provided by Liberis, our referral partner. 

For example, if you’re a cafe owner who needs to buy new catering equipment, a Merchant Cash Advance can release funds to cover your investment. You could then pay 15% of all your card sales until the cost has been repaid in full. 

Here are some of the reasons why businesses choose a Merchant Cash Advance. 

 

  • To fuel growth - if you’ve spotted an opportunity to increase sales but don’t have the cash to invest right away, a Merchant Cash Advance could enable you to act quickly so you don’t miss out. The funds could be in your account in as little as two working days once your application has been accepted. 
  • Simple budgeting - you only pay an agreed portion of your card sales, so there’s no fixed monthly repayment to meet if business is quieter than expected on certain days.
  • No collateral - a Merchant Cash Advance is unsecured, so you won’t be asked to put up any assets to cover it if you can’t pay. It’s worth bearing in mind that if you’re trading as a limited liability partnership or limited company, you’ll be asked to give a personal guarantee. 

 

Find out more about Merchant Cash Advance | Cardnet® | Lloyds Bank Business.

An overview of Invoice Finance

Many businesses operate on the basis of providing goods and services and then invoicing the customer. This can result in payment delays and subsequent cash flow issues, which in turn can stop you from being able to invest in things like hiring more staff and buying additional stock. 

 

What are my Invoice Finance options?  

Invoice Finance is not a one-size-fits-all solution. The overview below will give you a quick understanding of the various types and how they could work for your business. 

 

  • Invoice Factoring - fund your entire sales ledger and get support with optimising your cash flow. 
  • Invoice Discounting - fund your entire sales ledger and manage your credit control with this completely confidential solution. 

 

When you choose Invoice Factoring, your customers will know you’re using this service, so you need to consider this before making any decision.

One of the key benefits of Invoice Finance is it allows you to release up to 90% of your outstanding invoice value, which can have significant benefits, including: 

 

  • Adaptability - unforeseen payment issues can arise when you least expect them. Being able to react quickly through using Invoice Finance means less business disruption.
  • Better planning - having complete certainty over your cash flow gives you the freedom to plan confidently.
  • Saving time - chasing late invoice payments can be stressful and time consuming, especially when you’re already juggling multiple other tasks. Invoice Finance removes this problem to free up your time and headspace.

 

It’s worth noting that once your invoice payment is made to us, you’ll receive the remaining balance minus our fee. Fees are charged according to each individual business.

 

Find out more about Invoice Finance.

Is Asset Finance right for my business?

You might need to invest in company vehicles, equipment and machinery to start or grow your small business. Asset Finance can help you on your journey when you don’t have the available capital to fund the things you need. 

 

What can I use Asset Finance for? 

The list below covers a few of the most common Asset Finance business purchases: 

 

  • New or used manufacturing equipment - to help you make new products, improve capacity or upgrade your current equipment.
  • Company vehicles - if you’ve recently won new contracts, for example, you might need to invest in expanding your delivery fleet of HGVs or small vans. 
  • Renewable energy projects - your business could save money and become more sustainable by replacing or upgrading your current heating system and investing in solar panels.

 

Discounted Asset Finance is available for electric vehicles and energy-efficient equipment to support sustainability. You’ll pay a lower interest rate as long as the asset is used to reduce the environmental impact of your business.

When you have cash reserves set aside, it may not always be the best idea to exhaust these funds to buy equipment outright as this might put your finances under strain later. Funding a deposit followed by monthly payments can make buying or leasing vital items more manageable. Other benefits include:

 

  • Accessing new equipment and vehicles to stay competitive or gain an advantage. 
  • Flexible options at the end of your Asset Finance agreement such as buying, extending the lease, selling or returning. 
  • Sale & Hire Purchase Back could release cash into your business from assets you’ve recently paid for in full.

 

Here’s a quick look at the different Asset Finance options your small business could benefit from: 

 

  • Finance Lease - fund up to 100% of new and used hire vehicles and equipment with a choice to sell or extend at the end. 
  • Vehicle Contract Hire - lease new vehicles (3.5 tonne limit) with no deposit and the requirement to return them when the agreement ends. 
  • Business Hire Purchase - fund up to 90% of new and used assets with an option to own on completion. 

 

Find out more about Asset Finance.

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