Business Loans and commercial finance can seem daunting to most. Which is understandable with over 200 lenders currently offering some sort of commercial finance, all offering different rates, terms conditions and structures.
The rise of the ‘Alternative Lending Market’ has seen a huge influx of commercial lenders rise from the ashes of the 2008 financial crash, and whilst choice is a great thing, it has ultimately resulted in a confusing web of stats and offers, business owners can often be left wondering where to start.
Thinks mission has always been to help UK businesses effectively compare business loans and find the right type of funding for them, and with our unique blend of technology and expertise we have helped thousands of businesses find the right funding.
Our Knowledgehub was designed to work alongside our tech and ensure our clients understand the ins and outs of all things commercial finance when comparing business loans and commercial funding, which allows them to make the right choice for their business, as we know that no one understands their business as well as you.
Below we aim to break down, in an easy to follow form, the business loans world, and hopefully cover everything you need to know about commercial finance.
Types of Business Loan
The term business loan covers a broad spectrum, and can be used to label a number of different products; the most popular categories are;
If you’re looking to secure your funding fast, then an unsecured business loan will be the best route. Unsecured loans are business loans that don’t require ‘physical’ security to underwrite the loan, and are more heavily based on a company’s performance, turnover and overall health (trading history, credit etc).
Secured Business Loans
Secured Business Loans are loans or facilities secured against business assets, preferably ‘bricks and mortar’ assets such as the business premises or the businesses owners home.
Whilst, on the outset they seem daunting, the decreased risk is relative to the price and costings of the loan from a lenders point of view, with a lender requiring some sort of personal or business security to lower the risk to them, and price accordingly.
This term is used to describe a collection of lenders and products designed to help with short term cash-flow solutions. Working Capital Facilities are usually designed to work similarly to an overdraft giving you flexible access to cash when you need, and only paying for the amount you borrow. Some newer Lenders on the market have online accounts where you draw down and pay back and are charged monthly on the amount you borrow that calendar month. This type of product can be perfect for most businesses.
ABL is basically finance or re-finance for machines or anything considered an asset on the balance sheet. There are so many asset lenders all specialising in different types of both hard and soft assets so shopping around and finding the right lender is vital to affordability.
It’s an industry vital to manufacturing and engineering, but on the other side of the coin, is often one un-utilised by others that are unaware of the potentially competitive benefits.
This consists of a number of types of long term and short-term facilities (Bridging Loans from 1-18mths and commercial mortgages up to 30years) facilities, but ultimately is a short-term option and can be a real benefit to certain projects.
Types of Commercial Lender
With more and more banks, challenger banks and alternative lenders entering the market on a monthly basis, it’s important to understand the differences, and how those differences can be of real benefit or detriment to certain funding and projects. Below, are the main types of funders out there right now, and what we think about each;
High Street Bank
Obviously, the most common of them all. High Street banks have hundreds of years on the ‘new breed’ of lenders around, and with that brings years of risk analysis. As a result, banks will decline 8/10 business loan applications, and tend to only favour large, high yielding deals. We have seen recently, that whilst their risk reflects their demographic, their prices are not particularly competitive, with cheaper rates being found on the alternative market.
Peer-to-Peer (P2P) Lenders
The newest of the new breed. Peer-to-peer Business Loans have been around for about 5 years, with Zopa being the first consumer lender, and Funding Circle the first Business Lender. They tend to be very tech orientated, with many preferring online journeys, which means the client cannot get any real advice on the loan. Whilst to the borrower they seem and appear the same as any normal loan, they are funded by individual and institutional investors, who decide to bid on and fund your business loan based on its risk category.
A term often given to new or privately-run banks. Due to the nature of their structure they are not particularly competitive, however, what they lack in competitiveness, they gain in their broader underwriting criteria. They will often take a creative look at your project, and be more likely to take a ‘punt’ on a riskier project.
Business Loan Interest rates
Just to keep the confusion consistent, business loans also consist of numerous interest rate structures, from monthly, to yearly, with depreciating interest and rolled up interest all to take into account.
It’s vital you consider the structure of the interest when applying for finance, as choosing the wrong type for the wrong need can cost your business considerably; don’t make the mistake of opting for what seems the simplest, as these are often the costliest;
We aim to break this down;
Many Working Capital lenders will offer this. This is structured depending on how long you borrow the money. Many online facilities are built like overdrafts, so if you draw £1000 at a 1.1% monthly interest rate you will owe £11 in interest in 30 days. If you kept the full £1000 out for 2 months the interest cost will raise to £22… and so on. It’s designed to give businesses control. However, if your investment is long term, this really isn’t he facility for you
Most 3-5yr unsecured term loans are based on APR. APR is the yearly cost of credit and worked out prior to draw down. So, if you borrowed £1000 for 12mths at 10% you would owe £100 in interest at the end of 12mths. So, in this instance your monthly payments would be 12 x £91.67.
Libor is the Bank of England’s base rate and recommended rate of interest. Banks usually charge an interest rate + Libor, as it maintains a level of protection. Unsecured lenders do not do this, and work completely independently to libor
Many loans (especially property loans) offer this option. This would usually work with the monthly payments being only the interest costs, and the capital repaid at the end of the term (bridging loans).
Business Loan Eligibility Criteria
Think use a unique and comprehensive comparison tool called iFunds to help us find a successful match in 85% of occasions. Whilst we understand that our tech is vital, especially when it comes to saving time (our iFunds software searches 18,000 data points in seconds), it’s also important to understand what your business is, or could be eligible for, so that you can structure your plans around the eligible funders and products.
What are Commercial Lenders Looking for
Of course, its important to remember there is no ‘set standard’ criteria for business loans, as every lender is different, and what might be not for one, might be perfect for another; which is why shopping around is so vital;
General points that tend to wet the lenders appetites are;
- Turnover Vs Loan amount (usually ideally it will be 30% of your turnover)
- Trading history over 18 months – this suggests experience and lowers risk
- No serious adverse – Settled CCJ’s will be entertained
- Is the Business Profitable
- Business must be based in the UK
- Are the director’s homeowners – this usually affects the amount offered
Again, we must re-iterate, whilst the above is ideal for any lenders, there is always an option out their. We are surprised daily by our panel, and they will often take a creative look at an app. The best bet is to be honest and upfront, and our experts will find you a solution.
Or you can try iFunds for yourself, and get a gauge of what your business is eligible for; Try iFunds
Whilst their preference maybe different, their questions and supporting document requests are always based around the same aspects of your business; expect to be asked;
- Turnover and subsequent profit/loss
- Bank Statements (usually 6 months)
- Last Filed Accounts
- Loan amount vs Turnover
- Your Trading History
- Credit details of the directors
As previously mentioned, lenders require some sort of security in order to lend money, whether that’s a physical charge placed on assets or goodwill placed on the business based on turnover, their will often be some sort of legal guarantee required in order to receive your business loan.
Personal Guarantees & Directors Guarantees
The classic definition of a personal guarantee is an individual’s (in this case the directors of the business) legal promise to repay the debt. Providing a personal guarantee means that if the business get into a position that means they are unable to repay the loan, the individual guarantor is then personally responsible. These are required in 90% of unsecured business loans.
Legal Charge (Charging Order)
A Legal charge on a property is iftem required by lenders in order to secure the debt and is often reffered to as a charging order. This secures the debt against your home or business property you own. Charges means that one could lose ones residential home if the loan is not repaid (foreclosure). Once a charging order has been made, a creditor can apply to the court for another order forcing you sell your property.
A debenture is kind of one step down from a legal charge, and is still a sedurity debt instrument, that means the debt is not secured Physical assets. They are mnore or less and flag placed on the assets saying there is a stake (in case everything goes bad), they will be usually the second people in the queue (are the charge issuers) to get their share if the company goes into liquidation
This is similar to a debenture, and is a floating charge over a property. A unilateral notice will show up on the charges/land registry and is used to register any interest which a third party may have in a particular property or estate, and notify the other party of its existence.
Unsecured Vs Secured Business Loans
Depending on who you talk to, will depend on the answer you get here. We would always recommend taking the advice of an intermediary as opposed to any lender direct (wink wink).
Both loans structures have their pros and cons
Quick and Easy
No charges or security
Often no fees (legal etc.)
Slightly higher in Price
Aggressive collection teams
Amount available is limited
Lowest price loans
No top end amounts
Security is required
Business Loan Pricing and Risk Bands
As previously touched on, pricing can very much vary between products, lenders and due to risk. Whilst this is a deep science, that is extremely complex, we have aimed to give you a guide, or rule of thumb if you will, regarding the types of pricing in each category;
Generally, risk is broken down into the following
Cat A+ – Best of the Best, clean business and personal credit files, profitable. Trading 5+ years.
Cat A – Clean personal and business credit, healthy profits, trading history 2+ years
Cat B – Minor scuffs on credit file in the past, but good recent performance.
Cat C -Recent credit problems such as CCJs (settled) or any missed payments
Cat D – Bad personal credit but an overall good business. CCJ’s (unsettled) or defaulted payments.
Unsecured Business Loan Rates
These are usually broken down into the 5 categories – A+, A, B, C, D
|6mths||1 Year||2 Year||3 Year||4 Year||5 Year|
Secured Business Loan Rates
This is broken down into a similar risk category, but without the difference in terms.
|0–24months||24–60 months||60–120 months|
Working Capital Loan Rates
Working capital; business loans work slightly different to term loans, in as much as they are charged monthly. Credit and risk still have a huge part to play in price. Below is a rough guide;
|0–12 months||12–24 months||24–36 months|
The SME Guide To Business Loans & Alternative Commercial
Your Easy to Follow Road Map to Finding the Best Funding Solutions for your Business
Take some time to THINK about your next move…..
With over 250 lenders and financial institutions, offering 1000’s of products, choosing the wrong type of facility or business loan can not only cost you thousands as well as untold headaches.
All lenders will promise the best and cheapest solution, but, just like anything, the best deals are found by shopping around.
At THINK we understand that by walking the customer through all the steps, options and factors involved, and mixing that with our industry leading FinTech we can find a match in a record breaking 85% of occasions.
Allowing you, the business owner, the ability to make an informed decision by seeing ALL eligible options and ultimately one step closer to finding your business the best and most suitable facility to grow at the pace and direction that you choose.
Peer-to-Peer Loans (P2P)
- P2P Business loans are essentially loans funded by ‘private investors’ using an online ‘investor Platform’
- Terms usually range from 6mths – 5 years
- Most P2P are unsecured, BUT SOME WILL REQUIRE A PERSONAL GUARANTEE
- Interest Rates range from 4.9% – 21.7% (priced in Risk Bands depending on credit)
- Strict underwriting and acceptance criteria to ‘protect’ investors
“Essentially, for the borrower p2p loans are no different from usual term loans. Except they work within their own little economy and community. Interest rates are not affected by BoE base rate, and risk is determined by a combination of credit scoring and internal data analysis of ‘similar’ businesses’’
Merchant Cash Advance
- Borrow Against Future Card Transactions
- No Credit Score Required
- Borrow up to 120% of monthly card turnover
- Pay back a pre-agreed percentage of future sales – Usually 9%-16% of card takings
- Advance anything from £2500 to £500,000
- No Fixed Monthly Payments, APR or hidden fees
‘Perfect for quick access to cash. Usually takes a day or so, and is used most often by retailers and hospitality and those that take reasonable amounts on card transactions, to help with cash flow and working capital solutions”
Working Capital Facilities
- Facilities from 1mth to 5years
- Like an overdraft
- Only pay interest on what you borrow
- Monthly Interest Rates
- Some offer daily, weekly or monthly repayments
- Rates from 1.1% – 6% per month
- Great for short term borrowing
- Most popular type of lender, meaning the competitive space can result in cheaper options by shopping around
“Some newer Lenders on the market have online accounts where you draw down and pay back and are only charged monthly on the amount you borrow that calendar month. This type of product can be perfect fit for most businesses if used correctly”
- Fund up to 85% of an invoice
- On-going or spot factoring solutions
- Over 100 IF lenders out there
- Many use bespoke fintech to upload unpaid invoices and have them paid instantly
- New Privacy rules help protect your interests
- Rates usually around 1-5% of invoice value
- Many borrowers add an invoice charge to invoices to cover the above
“Invoice finance does what it says on the tin; it finances (unpaid) invoices. Many businesses will have 30, 60 or 90 days’ terms on some invoices, and IF lenders are prepared to loan usually 85% or more, of any one invoice upfront”
Asset Based Lending (ABL)
- ABL (Asset Based Lending) uses the new or existing asset as security for the loan
- Great way to fund large machine or any asset purchases
- Refinance existing assets to free up a company’s liquid capital
- Lenders tend to specialise in certain sectors and assets
- Over the 150 asset lenders in the market
- Choosing the wrong type of lender can cost a business more than needed
“It’s an industry vital to manufacturing and engineering, but on the other side of the coin, is often one un-utilised by others that are unaware of the potentially competitive benefits”
- Secure the loan against personal or business assets
- Preferably bricks and mortar
- Rates start from 2% over base rate
- Terms from 6mths to 30 years
- Can take longer than unsecured to to ‘legals’
- Your property can be repossessed if payments are not met
“Whilst, on the outset they seem scary, the decreased risk is relative to the amount, with a lender requiring some sort of personal or business security to lower the risk to them, and price accordingly”
- Terms from 1-18 months usually
- Short term option and can be a real benefit to certain projects.
- Interest is charged monthly, but ‘rolled up’ and the total paid at the end of the term, with the capital, instead of monthly.
- Rates from 0.75 – 2% per month
- LTV around 70%
- Exit funding needs to be established
“Often used for property development projects, but doesn’t need to be specifically for that, and therefore can be of great benefit to new ventures or businesses where turnover or profitability isn’t going to be realised for a few months or years”