Small business loans: what’s available for small business owners?
Access to extra cash can be vital for small businesses. Whether it’s to help with cash flow or to expand business capacity, there are types of loans to suit all purposes.
Here is an overview of the three main types of small business loans available to business owners: overdraft facilities, equity loans, and fully drawn advances.
One universal truth any business owner knows is that bills come much more regularly than payments do.
The purpose of an overdraft facility or loan is to help avoid cash-flow-crises. Borrowers can get money quickly to cover costs such as wages, stock orders and anything needed to keep the business operating while waiting for income to flow in.
The overdraft facility is connected to a business account and has a set limit to available funds. It usually requires some sort of security to establish.
This is a flexible option for business owners who may need to access cash quickly to cover costs in the short term.
It is important to understand the difference between an authorized overdraft and unauthorized one. Unauthorized overdrafts are where bills are paid from accounts with insufficient funds. These can incur considerable fees.
Most overdraft facilities allow borrowers to pay off what they can, when they can as long as they stay under the overdraft limit.
Equity loan or line of credit loan
An equity loan is a loan secured against a commercial or residential property. It allows borrowers to draw on an account up to an approved limit.
This type of loan gives borrowers quick and flexible access to funds: as long as the amount drawn does not exceed the limit, the borrower can draw on the funds at any time.
Borrowers need to make payments to cover bank fees and the interest. Because equity loans are secured against a property, they tend to have lower variable rates than other types of loans. Loan terms are usually between one and seven years.
Equity loans are the most flexible option for borrowers, but if borrowers fail to make their payments, they can put their property at risk.
Fully drawn advance
A fully drawn advance is most like a typical loan. It provides a lump sum amount to borrowers with a set term for repayment and scheduled repayment dates.
Fully drawn advances are secured against a mortgage for a residential or commercial property. They are used to help businesses expand their capacity and for long-term investments, rather than for day-to-day operational expenses.
One advantage of a fully drawn advance is that borrowers know the term of their loan and their repayment schedule. This allows businesses to plan ahead.
The type of loan you require will depend on what you need it for. Understanding the purpose of the business loan will help you choose the right one for you.