Finance is the backbone of any business. When looking for capital, securing the right type of business finance can be a big catalyst for growth.
From start-ups looking for a ‘leg up’, to fast-growing businesses which are expanding operations and companies that need an injection of funds to help manage cash flow – there will be a business loan suitable for these needs.
There are a few financing options on the table. In this article, we will guide you through the differences between them, giving you the information to make the best decision.
Read on to learn about the main types of business loans, including secured vs unsecured loans, short-term vs long-term options, and more specialised loan types.
Secured vs unsecured business loans
There is an important distinction to be made between these types of business loans:
Secured loans
Secured loans require companies to offer up collateral assets – such as property, equipment, or inventory – that the lender can claim if the loan is defaulted on. Since the lender of a secure loan has this safety net, they often come with lower interest rates and higher borrowing limits.
This type of business loan is considered ideal for businesses with ample assets and a need for substantial funding. Secured business loans may be suitable for big investments such as a facility upgrade or equipment purchases.
The potential downsides of secured business loans for some borrowers are the risk of losing assets if a loan is defaulted, and a longer approval process in some cases.
Unsecured loans
Unsecured loans don’t require collateral and are approved based on the creditworthiness and financials of the business.
This type of loan is typically smaller than secured loans. They may come with higher interest rates due to the increased risk to the lender.
Common uses for unsecured loans include marketing campaigns, ongoing working capital and cash access to capitalise on short-term opportunities.
We can highlight the main advantages of unsecured loans as the absence of risk to business assets and the fast approval process in some cases. Businesses may see the downsides as higher interest rates and stricter credit requirements, as well as lower limits on the amount that can be borrowed.
Short-term vs long-term loans
Another key distinction is the duration of the loan:
Short-term loans
Short-term loans usually have repayment periods of less than 18 months. These are ideal for addressing immediate business needs like seasonal inventory, cash flow gaps, or emergency repairs. They offer quick funding, are flexible, and are typically easier to qualify for.
However, businesses should note that they can be attached to high interest rates and that the quick repayment schedule could put a strain on cash flow.
Long-term loans
Long-term loans can last several years – sometimes up to 10 or even 25 years depending on the purpose – and are considered more suitable for strategic investments. The type of business plans they support may include purchasing commercial property, expanding operations, or acquiring another business.
With lower monthly payments spread out over time and lower interest rates than short-term loans in some cases, they will appeal to businesses who are looking to the future.
It should be noted that long-term loans require strong credit and financials, and may have longer approval times, with more paperwork involved.
Specialised business loans
Finally, let’s look at specialised loan types that are designed to meet specific business needs:
Invoice financing
Invoice financing lets businesses borrow against outstanding customer invoices. Lenders advance a percentage of the invoice value, with the rest being paid – minus fees – once the invoice is settled.
For businesses that have cash tied up in unpaid invoices and need working capital, this can be a good finance product that means they don’t need to wait for customer payments or take on long-term debt.
A merchant cash advance is a similar type of business loan that can give businesses generating card sales quick cash access.
Asset financing
Asset financing gives businesses the capital to purchase or lease equipment, machinery or vehicles, by spreading the cost over time. The asset being financed can actually serve as the collateral in some cases, making it a form of secured loan.
This type of loan can help companies that need help buying or leasing items that are vital to their business.
Startup loans
As the name suggests, this type of loan helps start-ups which might struggle to secure traditional loans due to a lack of revenue, a lower credit rating, or the absence of a trading history or revenue.
Start-up loans are offered by government schemes as well as private lenders.
Ultimately, choosing the right type of business loan will rest on companies evaluating the purpose of the loan, as well as their repayment ability, and available collateral.
