Education

5 types of small business loans you can use to expand your business

24 Oct 2022

Whether you’re looking to increase turnover, purchase new equipment, expand into a new location, or take advantage of upcoming growth opportunities, business finance can provide you with the funding boost you need to reach your goals. Here are 5 types of business finance that can be used to fund expansion.

barista getting ready for cafe opening

Growth finance can provide you with the capital you need to realise your ambition. 

Before taking out finance, you should ensure that you have the infrastructure in place to support your expansion, and use cash flow forecasting to determine whether or not you are able to invest in the growth of your business. 

The type of business finance you opt for will depend on your business’ unique situation and needs. There are, however, three things you can start thinking about:

Fixed rate vs. variable rate 

If your loan has a fixed rate it means the interest rate will stay the same until the fixed rate term comes to an end. If it’s variable, it could change. Most business loans are offered on a fixed rate basis. 

Unsecured vs. secured 

A secured loan is one that is backed by an asset, such as company vehicles, property or machinery. If you don't repay the loan, the lender can claim ownership of your asset. 

Unsecured loans aren’t backed by security, but the company may have to provide a personal guarantee, which means the lender may pursue you for payment if your business doesn’t meet its obligations. 

Large loan amounts will typically require security, whereas lower amounts are often unsecured. Because of the lack of security, unsecured loans may have higher interest rates, as they can be seen as carrying more risk. 

Long term vs. short term 

Loans come with different term lengths. 

A short term loan might be for 12 months, while a long-term one, like a commercial mortgage, may last 20 years or more. The loan term you opt for will depend – to some extent – on what you’re looking to fund, and how quickly you can repay the money. 

It can also depend on your business’ financial circumstances. 

5 finance types for business expansion 

1. Invoice finance

Invoice finance lets you release the cash tied up in your unpaid client invoices. So, instead of having to wait up to 60 days to get paid, the invoice finance provider will advance up to 90% of the value of your invoices almost immediately, for a fee. 

This type of finance could enable you to take on larger contracts, in line with your growth strategy. Crucially, invoice finance is for commercial invoices, so your customers will have to be other businesses as opposed to individuals.

Get invoice finance

Asset finance

Another way to facilitate business expansion is by investing in new equipment. But to do so up front can come with a huge price tag. 

Asset finance enables you to access equipment without having to buy it outright. Types of asset finance include leasing, hire purchase or sale and leaseback.

Asset finance is available on a huge selection of items. 

The chances are that if you need it, you can lease it. Leasable items include catering equipment, vehicles, office furniture, IT equipment, machinery – the list goes on! 

Get asset finance

3. Asset refinance

You could even unlock funding from the value of the assets you already own. 

Asset refinance allows you to borrow between 60 to 90% of how much your asset is worth, and the terms can be flexible. As with asset finance, you might be surprised by how many of your tangible assets can be refinanced for commercial purposes.

Get asset refinance

4. Peer-to-peer lending

If you’re looking to expand your business, you might be able to fund your plans through peer-to-peer lending (P2P). 

This is where a large number of private investors lend money to a business, typically through a P2P lending company’s online platform. Although the P2P company isn’t technically lending you the finance, you will apply for it through them.

P2P lending is often spoken about in the context of crowdfunding, however it’s important to remember that P2P is about loans as opposed to equity purchase or donation.

Get P2P finance

5. Commercial property finance 

If you're researching business finance to buy a new premises, you’ve probably come across commercial mortgages. Like a residential mortgage, you’ll be required to make monthly repayments that include interest charges as well as the money borrowed. 

The interest rate will depend on a number of factors. Some of these include the Loan-to-Value ratio, value of the loan, your business’ trading and credit history, who will occupy the building, and whether or not you’ve given a personal guarantee.

If you’re buying a commercial property, don’t forget that you'll need the available funds to pay for the deposit. Typically, commercial mortgage lenders provide up to 75% of the total value of the property. Can you afford to part with this amount of cash?

Get commercial property finance

Whatever your expansion plans are, Funding Options is here to help you navigate the business finance market. As the UK's leading marketplace for business finance, we match UK SMEs with the right funding options for their needs. 

Start your funding journey with us today.

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