A business borrows funds when its capacity surpasses its cash flow. A business loan can help you to start up a new business, purchase assets or equipment, manage cash flow or acquire new premises. The latter is covered by a commercial mortgage, whether you buy a building on just lease it. Here we will discuss the other forms of business loans provided by banks or other financial institutions specifically for business activities.
The health of a nation's economy depends upon the success of its businesses. In the UK, government has always given special attention to promoting both micro and macro organizations, and helping them to improve access to capital. So most financial institutions are more than eager to provide you with a business loan, although the current economic downturn makes the criteria and guarantees they demand ever more stringent, with correspondingly higher interest rates being charged.
Business loans come in many shapes and sizes, depending upon the unique needs of your company, but let's discuss the most common types of business loans available in the UK.
Cash Flow-Based Financing
Cash flow funding, or a cash flow loan, is a particular sort of debt financing where the financial institution or bank provides funds against your organisation's future cash flow or invoicing. Some companies also call this invoice financing. A business is lent such a loan when its trading activities surpass its cash flow. To secure repayment, your lender covenants you on your enterprise value, total interest coverage ratio, total debt and other such information. Basically, they look at your invoices and offer you a loan based on your projected future cash flow. In cash flow lending, you will probably pay a lower fee than asset-based lending, as you already have the cash in the form of the invoices against which you are borrowing. Loan terms vary from three to seven years, and business owners generally opt for this kind of funding to acquire a new business, extend their existing business or increase their working capital.
An asset-based loan is lent against your company's assets. In this case, the lender will naturally look at your assets, including plant, machinery, equipment and inventory. You generally go for asset-based financing to acquire expensive new machinery to increase the production capacity of your firm. You might have to pay a higher interest rate for this kind of loan.
Most banks will provide you with overdrafts against your investments, which save you from liquidation of those investments. This is most useful when you want to take advantage of a sudden change in the market and decide to expand. This is an unsecured form of lending, so your first choice for an overdraft will be the bank you have most transactions with. Depending upon your existing relationship, you can often manage a substantial level of overdraft in times of need.
Business Credit Cards
Most financial institutions now provide credit cards with special benefits for specific business purposes, which could be in the form of higher credit limits or lower interest rates for spending more on the card, or even waiving the fuel surcharge at the petrol pumps. Financial institutions often have special tie-ins with other organisations providing office space and equipment, suppliers and services, travel agencies or security and telecommunication service providers from which your could get some mileage. They also provide insurance covering you for business travel.
Leveraged finance means lending an organisation more funds than required in the normal course of business. This funding is riskier for your lender, so will be more expensive for you. Generally, a business goes for this kind of financing to achieve a specific objective like acquisition of, or merging, with another firm.
Author James Richardsdate added 2009-08-25 14:53:39