Business credit – what’s the right option for you?

Whether you’re looking after your cash flow or funding a new project, getting business credit can be essential for your long term success. From business credit cards to asset finance, there’s wide range of options to choose from. Read on below to understand what they all mean and make the best decision for your business.

Business credit cards

Business credit cards work like a personal credit card. You’ll have a set credit limit and can make purchases up to that amount. You may have an interest free window to pay it off, say 30-60 days, but then you’ll pay interest on any outstanding balance.

All lenders will perform a credit check when you apply, and your credit limit will depend on how creditworthy your business is.

Benefits

  • Multiple people can use the same account
  • Easy to track and limit employee expenses
  • You may also get cashback, loyalty points and other rewards

Downsides

  • With rates from 15-25% APR it can be expensive if you don’t clear the balance each month
  • Not suited to big investments or growth projects
  • Interest and delayed payments can make managing cash flow tricky

Overdrafts

In the past, overdrafts have been a useful means of accessing business credit, typically for working capital. If you have one set up with your bank, you can take out more money from your account than you have in there. Acting as a short term safety net, you can quickly access extra working capital when you need it.

Benefits

  • Quick access to extra working capital

Downsides

  • Usually a low credit limit
  • Can be harder for small businesses to access

Business loans

In recent years there has been a huge increase in the variety and specialism of business loan providers. In the past, banks could take weeks or months to reply and would often say no. However, in the last decade online lenders have radically changed the industry. Businesses can now get a loan in just a few days, and it has become a key avenue of business credit.

Often with higher available limits, you can fund projects large and small, as well as working capital, tax expenses and other day-to-day running costs. Lenders will perform a credit check to determine how much you can borrow and the interest rate you’ll pay, and you’ll make repayments over anything from 3 months to 5 years.

Benefits

  • Higher limits to fund projects both large and small
  • Interest rates can start very low
  • Fast applications – get funds in days
  • Secured and unsecured lending options
  • Suitable for a wide variety of business needs
  • Fixed monthly repayments make it easier to plan

Downsides

  • Longer term financial commitment
  • Less suitable for tracking expenses
  • Personal guarantee may be required

Invoice financing

Invoice financing allows you to access the money tied up in your unpaid invoices. You may have a completed a job today, but if your invoice won’t be paid for 90 days it can leave a hole in your cash flow. With invoice financing, a lender will pay you the majority of the invoice up front, then recoup the costs when the invoice is paid and take their fee.

Benefits

  • Get paid faster for completed work
  • No compound interest – pay one fee per invoice
  • Simple way to smooth over cash flow

Downsides

  • Only suitable for improved cash flow
  • Depends on unpaid invoices
  • Not helpful for large projects or growth

Merchant cash advance

A useful line of business credit if you have a lot of customers paying by card, merchant cash advance allows you to borrow based on your card sales. You’ll typically get a percentage of your average monthly card revenues. Repayments are then taken directly from your future card sales, making repayments very simple to manage. For businesses such as pubs, cafes, restaurants and shops, it can be a frictionless way to gain extra working capital.

Benefits

  • Simple repayments
  • Based on monthly sales rather than credit rating
  • Boost cash flow

Downsides

  • Only suitable for certain types of business
  • Won’t help with needs other than working capital

Asset finance

Asset finance allows is simply a loan where you use an asset as a security. It’s often used to buy new equipment, vehicles or machinery, but can also be used to release cash from assets you already own.

Say you want a new van but don’t have enough capital. An asset finance loan would give you the cash up front, then you repay the lender in monthly installments. Alternatively, say you needed to free up some capital and already had some assets such as property or equipment. You could borrow up to the asset’s value and repay in installments, and if you couldn’t repay, the lender would take the asset to recover its losses.

There are also options for equipment leasing that provide more flexibility.

Benefits

  • Assets could be almost anything
  • Help spread the cost of vital new equipment
  • Unlock cash in valuable assets you already have

Downsides

  • Can only borrow up to the value of the assets
  • Valuations can take time if using existing assets

If your looking for extra funds for your business, you could borrow anything from £5,000 to £500,000 through Funding Circle. Check your eligibility in 30 seconds at fundingcircle.com/businesses.