Loans Terminology and Choices
This page provides a simple introduction to the various options for business loans, and some alternative methods of raising finance.
Your options for obtaining business loans or other forms of finance revolve primarily around the following questions:
- How much risk do you want to take?
- How much long-term commitment are you prepared to make?
- What are your cash flow needs?
- How much time are you prepared to spend in financial planning and making your case to someone else?
- Who do you want to go and see?
Generally, the more of the risk you are prepared to bear, the greater commitment you make and the more time you spend in financial planning, then the easier it will be to find suitable loans and the cheaper those loans will be.
Your options to manage risk are:
- Secured loans: generally cheaper but you provide your house as security.
- Unsecured loans: more expensive but no security (but you usually have to repay the debt)
- Type of company:
- Establish your business as a limited company, which limits your personal risk
- Establish your business as a partnership/sole trader, which provides the lender with more options to recover unpaid debt from you.
- Type of loan:
- Fixed rate means you pay the same interest rate for the agreed period
- Variable rate (or tracker rate) goes up and down with market fluctuations
- Capped loans go up and down, but with an upper limit.
Your options for the level of commitment are:
- Fixed loans mean you have to pay back the regular amounts determined by the lender
- Flexible loans mean you can pay back more, if you wish, to pay off the loan early and save interest
Your options to improve short term cash flow are:
- Discounted loans are discounted for an initial period, before going up to a higher rate
- Cashback loans are similar to discount loans, but they provide all the discount up-front in the form of cash rather than a subsidised regular payment
- Payment holiday loans allow, after a period of good payment, you to skip certain payments and add that payment to the loan.
Your options for planning and presentation are many and various, ranging from seeking investment from venture capitalists (involving a high degree of planning and presentation) to self-certification (requiring very little financial information).
Your options of who to consult are:
- An independent advisor, who has access to a wide variety of loan and mortgage products.
- A tied agent, who can only sell products from one company.
There are also many other forms of raising finance.