Business Overdrafts
Be financially flexible with a business overdraft.
Understanding Your Borrowing Options
Read time: 7 mins Added date: 07/10/2024
Learn more about borrowing options available to help your small business.
Whether you’re a start-up or a more established small business, knowing all the facts about your borrowing options is essential before making any application.
As well as helping you invest for future growth, there are a range of borrowing options that can help you in managing cash flow, coping with unexpected expenses, or providing greater flexibility to help plan for the future.
We look at the various borrowing options and how they can best help your business circumstances. Please be aware that eligibility criteria and terms and conditions will apply for all products.
You may need to invest in staff or infrastructure to get your business idea off the ground or fund your expansion plans. There are a few things to think about before applying for a business loan.
How much can I borrow?
The amount you can borrow for a small business loan is dependent on several different factors, including:
- Your business credit score
- How long you’ve been trading
- Your company accounts.
It’s important to carefully consider how much you need to borrow and have a detailed plan on how you’ll use it to help your business.
What about repayment terms?
It’s vital to calculate the affordability of your loan repayments before going ahead. Our repayment periods start at one year, but you may want to pay back your loan over a longer time frame.
Some crucial things to bear in mind:
- Does the repayment schedule look comfortable, or will it put your finances under strain?
- If you were to lose your biggest customer, would you still be able to afford the monthly repayments?
- If you plan to grow your business by investing in equipment, for example, have you factored in additional costs such as staff, insurance, tax, etc.?
Which type of small business loan suits my circumstances?
In addition to your loan amount and repayment terms, you should also think about the best type of loan for your small business.
- Secured or unsecured? Secured loans need a valuable asset to be put up as collateral in case you can’t make the repayments. In contrast, unsecured loans don’t require this commitment and are based on your business credit rating. Secured loans typically come with lower interest rates due to the reduced risk posed to the lender.
- Fixed or variable interest rate? If you’d like peace of mind, opting for 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 go up and down in line with any changes to the Bank of England base interest rate.
Running a business doesn’t always go to plan. Late payments, unexpected repair costs and poor weather can all impact your cash flow. Many small business owners like to have a safety net to help them deal with unforeseen circumstances. Here’s a quick look at how Business Overdrafts work and the various benefits.
- Flexibility - unlike taking out a business loan, an overdraft can be used multiple times. For example, if you run into temporary cash flow problems, your overdraft can be a buffer until you receive funds and repay it. You can then use it again if you need to.
- Peace of mind - a Business Overdraft gives you one less thing to worry about. Small business owners need to be agile with their finances. Even if you never use it, having an overdraft means you can adapt quickly and pay your suppliers and staff for example, if you hit a temporary bump in the road.
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
Another borrowing option that may be suitable for you is Business cards. Credit and Charge Cards work slightly differently, so in this section, you can learn more about how you and your employees can benefit.
Business Credit Cards
As your business grows and you hire more staff, managing your expenses can become more time-consuming.
A Business Credit Card has two main functions:
- It helps you ease any cash flow pressures
- It makes it easy for your employees to pay for relevant goods and services online or when travelling for work
- It offers flexible repayment options – pay the balance in full each month, the minimum payment or an amount of your own choice.
Business Charge Cards
Business Charge Cards have a higher maximum credit limit and suit well-established small businesses and those going through rapid growth. Here’s a quick snapshot of what to expect:
- You can issue unlimited cards with their own spending limits
- The outstanding balance is paid in full each month so there is no interest to pay
- Tracking and managing your expenses online is usually a key feature, which comes in handy when reconciling your Business Charge Card transactions.
Both Business Credit cards and Charge Cards often offer introductory offers and cashback. Both are also subject to status and conditions apply.
Find out more about Business Cards
Whether you’re starting out or looking to grow your business, you may need to invest in equipment, machinery and vehicles to operate. Depending on the cost, you may not have access to the funds you need to purchase these outright. That’s where Asset Finance comes in.
Putting your cash reserves into buying large items can strain your day-to-day finances. Funding a deposit and then making monthly payments towards purchasing or leasing critical items through Asset Finance can make it more manageable as your business expands. Other benefits include:
- Accessing new equipment and vehicles to get ahead of or keep up with your competitors.
- Flexible options at the end of your Asset Finance agreement, including buying, returning, selling or extending the lease.
- Sale & Hire Purchase Back could release cash into your business from assets you’ve recently paid for in full.
What can I use Asset Finance for?
Asset Finance is available for a wide range of purchases across various industry sectors. The list below covers some of the most common.
- New vehicles - expand your fleet to service new contracts, from small vans to HGVs.
- New or used manufacturing equipment - increase your capacity, produce new products or upgrade your existing plant.
- Renewable energy projects - upgrading your heating system, installing solar panels or biomass boilers at your premises could help you save money in the long term and be more sustainable.
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.
Not all Asset Finance is the same. There are three broad options which provide different features depending on the needs of your business. Here’s a quick overview.
- Business Hire Purchase - fund up to 90% of new and used assets with an option to own on completion.
- Finance Lease - fund up to 100% of new and used hire vehicles and equipment with an option to extend or sell at the end.
- Vehicle Contract Hire - lease new vehicles (up to 3.5 tonnes) is with low or zero deposit and the requirement to return the vehicle when the agreement ends.
Find out more about Asset Finance
Depending on your business type, you might invoice for goods and services and have to wait for payment. This can cause cash flow problems and prevent you from investing in new stock and growth plans.
Invoice Finance allows you to quickly get up to 90% of the value of outstanding invoices, which can deliver several benefits, including:
- Peace of mind - you’ll know exactly when you’ll get your money so you can plan accordingly.
- Scalable finance – your available funding grows in line with your business.
- Time savings - chasing multiple unpaid invoices can take your focus away from other vital business activities, and Invoice Financing means you don’t have to spend time on reminders.
What are the different types of Invoice Finance?
It’s essential to be aware of the different Invoice Finance options available and how they can work for your business. Here’s a quick overview.
- Invoice Factoring - this service involves funding your entire sales ledger and getting support with optimising your cash flow.
- Invoice Discounting - fund your entire sales ledger and manage your credit control with this confidential solution.
With Invoice Factoring, your customers will be aware you’re using this service, so you need to consider this before making any decision.
Find out more about Invoice Finance
A Merchant Cash Advance allows retailers to get money quickly to help you run or grow your business. This is repaid through an agreed percentage of your future card sales.
For example, if you’re a coffee shop owner looking to invest in new equipment, you could release cash to fund the initial investment and pay back 20% of all card sales until you fully repay the agreed amount.
The main benefits of a Merchant Cash Advance include:
- Easy budgeting - because there’s no fixed monthly repayment amount, only an agreed percentage of card sales, you can plan your finances accordingly.
- Grow your business faster - 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.
- It’s unsecured - this means you won’t be asked to put up any assets as collateral. However, if you trade as a limited company or limited liability partnership, you’ll be asked for a personal guarantee.
Find out more about Merchant Cash Advance | Cardnet®