Choose the Right Business Loan for Your Company

Let’s talk about how to choose the best business loan without being tricked. Choosing the right finance can be the turning point of your growth success or the reason you will miss the opportunity completely. If you are simply after some cash flow relief, need to buy some kit, or have been hit by an unexpected bill, getting the wrong kind of loan will either cost you a great deal or suffocate your cash flow.

Here is a straightforward, layman’s guide to dealing with short-term business finance.

Firstly, get really clear on the reason that you need the money. Before even considering the idea of contacting lenders, write down the exact purpose of the cash. Different loans are designed for different purposes — using the wrong one will make you pay heavily.

Common short-term reasons for taking out a loan are:

Aftermath of the pandemic (payroll, suppliers, rent)
Stocking up before the Christmas or summer periods
Financing a large new order
Repairing something that has broken down
Helping you while customers take a long time to pay invoices

Quick tip: Just jot down your goal and for how long the business will need the money. It helps you not to choose something that doesn’t suit.

Be aware of the main choices (and who they are the best for)

These are the options in simple terms:

Short-term term loan: You receive the total amount at once and pay it back within 3–24 months. It is a good solution for planned one-off projects.
- Great for: new machinery, bulk buying of materials, specific projects.
Revolving credit facility: In essence, it is an overdraft account with a higher limit. You withdraw the amount you need and you pay the interest only on the amount you use.
- Great for: businesses with irregular or unsteady cash flow.
Invoice finance (factoring or discounting): This is the method by which you get access to working capital that is tied up in unpaid invoices.
- Great for: businesses that have to wait for 60–90 days before their large B2B customers pay.
Merchant cash advance: The lender takes a certain percentage of your daily card sales until the amount advanced is repaid.
- Great for: cafés, shops, restaurants, i.e. businesses heavily reliant on card payments.
Asset finance: You can take a loan against your kit, vans, machinery, etc.
- Great for: buying or refinancing new gear without having to pay the full amount upfront.
Bridge loan (business version): A relatively quick, large loan secured on property.
- Great for: situations when you want to buy another business quickly or when you need a lot of money fast and own property.

Don’t just look at the interest rate — pay attention to the REAL cost

A lot of people are deceived by the ‘low rate’ offer and then they are hit hard with the fees. You should always consider:

Arrangement fees, admin fees
Early repayment penalties
Interest charged daily or monthly
Are the repayments fixed or variable
What will be the cost if you decide to extend the loan in case things don’t go as planned

Golden rule: Whenever you talk to a lender, ask him: “What will be the total amount that I will have to pay back?” – not just the APR. The total amount to be paid back is the one that should be used for comparison.

Ensure that the duration of the loan corresponds to when you will actually have the money

Short-term loans should be paid off from short-term cash inflows. If the duration is too long = you will be paying extra interest for no good reason. If it’s too short = you won’t be able to make the repayments and will get stressed.

Examples:

Are you stocking up for Christmas in October? It would be best to get a 4–6 months loan.
Have you placed a big order with the payment due in 90 days? It would be safer to get a 120-day loan.
Is your new machine going to generate revenue for a year? Then a 12-month term would make sense.

Hint: Prepare a simple cash-flow forecast (even on a spreadsheet) so that you know exactly when you will be getting money.

Know whether the lender will want secured or unsecured

Unsecured: It is dependent on your credit score, the length of time you have been trading and your turnover. It is quicker, but usually, the loan amount is smaller and the interest rates are higher.

Secured: They charge property, invoices, vehicles, or other assets in return for the loan. It is a bit slower to arrange, but you can get a higher amount and at a lower interest rate.

In case your business is new or your turnover is very unstable, by giving security, you are often able to get a much better deal.

Speed vs cost — it is not always possible to have both

Short on cash and need it tomorrow? Merchant cash advances and short-term business loans are super-fast… but expensive.

Are you willing to wait a couple of weeks? You will typically get a cheaper deal then.

Only you know how much time you have – so think it over.

Compare offers and avoid bad lenders

Good lenders openly disclose the costs of the service, are willing to explain the risks, have good reviews, and are often regulated by the FCA.

If a person is not very transparent about the fees or is pressuring you to sign the agreement immediately, then it is better to take your leave straight away.

Working with an independent broker can help you save a lot of time and is likely to get you better offers (as they are paid by the lender and not you).

Have a solid plan for the repayment (and a Plan B)

It is not only about getting the money – it is also about returning it without causing yourself problems.

Where is the money coming from? The extra sales? The big invoice that is due? Later refinancing?

Make sure that the numbers work even if a customer pays late or sales are slower than you anticipated.

The last piece of advice

Short-term finance is great when you use it right – it keeps the business going, allows you to say “yes” to the opportunities that come your way, and helps you get out of tight spots. However, if you choose the wrong product or lender, it can be very harmful to you.

Do not rush with your decision, be very honest with yourself in regards to your cash flow, ask many questions, and you will come out of the situation stronger.

You can do it. Just don’t rush in without ‍‌‍‍‌‍‌‍‍‌thinking.