Portman Asset Finance is a Business-to-Business finance lender and broker. We do not provide specific financial or tax advice to individual companies. For recommendations regarding your individual company, we recommend seeking professional advice from your own accountant.
Business finance offers a cash injection into a business and is repaid with interest in instalments (usually monthly) over an agreed period. Finance is typically split into 3 main types: Loans – simply borrowing cash to be used across your operation. Asset Finance – acquiring new equipment with variations of lease or hire purchase agreements. Equity Release – Refinancing high value items that you already own, using them as security for a loan. Before we get into the detail of each let’s consider why finance can be a fantastic way to advance business growth,
Why Should I Consider Finance?
Finance allows a business to get what it needs right away. Sometimes opportunities arise suddenly, markets change, or growth opportunities open up. Rather than saving cash each month, businesses can get what they need to grow right away, whilst the opportunity still exists. In return, the cash or new equipment allows a business to grow and earn additional revenue whilst making the monthly repayments.
Right now, inflation is high and interest rates are rising, taking finance now offers the certainty of monthly budgeting, fixing interest rates at the most competitive level for your business, and buying at today’s prices – beating inflation.
Using your business’s free cash for large outlays such as new equipment or vehicles can present some risks. Whilst finance ultimately adds to the cost of a product, a lack of free cash can mean an inability to pay operational costs including staff wages, stock holding or cope with supply chain or payment delays. Buying capital equipment with an overdraft or credit card also uses up what is often seen as a business’s last line of emergency credit and makes it more difficult to obtain other forms of finance later.
Business loans can be short-term, medium-term or flexible, they can also be secured or unsecured. Typically, the funds can be used for any business expense, whether that be refurbishment, property costs, operational or stocking costs, covering staff wages or gaps between work and actually getting paid.
Short-term loans are usually for less than 2yrs, used to cover a temporary issue or ride out a difficult trading period. These loans can consist of a merchant cash advance, where the funds are secured against future transactions, invoice financing, where funds are leant against outstanding invoices, a cash injection, or simply a line of credit to be drawn down as you need to use it. Short-term loans generally have less stringent acceptance criteria and quick approvals are more common.
Medium-term loans usually run from 2 to 5 years and are often used for projects such as refurbishments, investments that don’t qualify for individual asset finance, to buy an array of different items, or partly to buy equipment and partly to supplement free cash in the business.
Flexi loans are often short-term but with flexible repayment schedules, allowing you to only pay a minimum amount then to overpay however much you can afford, with interest only payable until the loan is settled.
Often, a new business may need an injection of finance to get off the ground. There may be specific equipment, vehicles, stock (or many other things) you need to be able to deliver your service or product to customers. However, you need to make money to purchase these. It’s a classic chicken and egg situation. You need equipment to start producing or stock to sell to customers, but you need revenue to pay for the equipment. A cash injection from a loan works for this familiar problem, allowing you to get started and even scale your business far quicker. Startup loans are a great alternative to other financing options such as credit cards or accessing operational costs. Using up these other sources of funding can inhibit your ability to access finance later.
Brand new businesses don’t always find finance easy to come by due to the lack of trading history. A personal or cross-company guarantee, or other form of security is most often required for a loan. Asset finance can be easier to obtain where a large piece of equipment needs to be bought, as the asset itself is security for a lender. If you are a new start business, you may find buying hard assets on finance easier than going for a straight cash business loan.
Is the equipment you need to grow your business expensive? Would new equipment enable you to grow faster and pay for itself if you could find a way around the significant upfront costs? Asset finance exists to solve this exact problem and could be the perfect solution for you. The vehicles, machinery or equipment you need to take advantage of opportunities often come with hefty price tags. Thankfully, you can split the cost over smaller regular payments through asset finance.
Assets are generally divided into hard and soft. A hard asset is something that will have a significant value at the end of the finance period, typically machinery and vehicles fall into this category. A soft asset is something that hold less value over time, fitness equipment, technology or fixtures and fittings fall into this category. Alongside your business’s credit profile, the value of the item at the end of the term has an effect on the interest rate at which a lender is willing to provide funds as each asset provides more or less security for the lender.
With asset finance, the lender purchases the equipment and leases it back to the business for agreed ongoing instalments. This allows you to access tools for growing your business at affordable monthly rates without tying up existing lines of credit or using up cash reserved for other purposes.
There are a couple of common types of asset finance. Each has unique benefits, and both can be valuable depending on your situation.
Hire purchase is one of the most common forms of asset finance. With hire purchase, you have a guaranteed option to buy the asset outright at the end of the contract, though it does require the VAT to be paid upfront and often a sizable deposit. If the equipment will continue to benefit your business, will not need upgrading and will provide lasting value, this may be the best type of asset finance for you. Hire purchase also comes with the ability to claim some capital tax allowances. Hire purchase is available with an end of term balloon payment, or without, depending how a business wants to structure the payments.
The other kind of asset finance, lease finance, typically involves a lesser deposit and the VAT is spread over the term, making the initial outlay lower. Monthly payments can also be offset against revenue for tax purposes, but capital allowances cannot usually be claimed. Leasing is designed as a rental, involving return of the asset at the end of the contract, though a business can continue leasing the item, or arrange for purchase of the item by discussing this with Portman at the end of the term.
This can be the best financial decision equipment that is used for a one-off or a limited number of projects. Buying the equipment may be a significant and unnecessary expense if it sees little or no use after the initial asset finance period. It may also come with additional costs, such as storing or maintaining the equipment. However, lease finance is also our most popular form of finance for equipment, machinery and vehicles due to the lower initial outlay and flexible end of term options.
Equipment refinance is one of the best ways to free up funds that can be used in any area of your business. Equipment refinance does this through selling equipment you own outright and leasing it back. This releases tied-up capital and moves the asset’s cost to ongoing monthly payments. The freed-up money can far offset the monthly instalments when used well. Equipment finance is available with both hire purchase lease back and lease finance options.
Business Loan FAQ
Can I repay a business loan early?
Yes, you can usually repay business loans early. If your lender does not charge early repayment fees, this could save you money. To repay a loan early, just contact the lender for a settlement fee.
How soon do you start paying back a business loan?
You will most commonly need to start repaying a business loan immediately, relative to your repayment terms. If you are making monthly instalments, your first payment will typically be around 30 days after receiving the funds.
Does a business loan affect personal credit?
A business loan does not affect your personal credit if you keep your personal and business finances separate.
Business Finance Fuels Growth
Finance is a great way to introduce or free-up capital for a business. They get your business up and running and enable business growth. The various funding options can give you access to essential equipment to expand your business’s capabilities. Used well, the trade-off of interest for cash infusions can transform your business. If using to win new contracts, capture new opportunities or expand to serve increasing demand, the financial gain can outweigh and interest payments.
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Learn More About Business Loans
Would you like to learn more about business loans? Our expert team have put together some amazing content to help you explore your finance options and unlock your business’ potential. Start with 10 Advantages Of Business Finance to see why business loans may be the best finance option for you. And check out our Business Finance Made Simple guide for a clear look at managing your business’ funds.