Whether you need a lump sum of £5,000 as soon as possible, or simply want the financial breathing room to allow you to focus on growth, there’s a range of business finance products that could help. This guide will help you explore your options, and the benefits and disadvantages of each.
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Here is a non-exhaustive list of popular business loan and revolving business credit products that you could consider:
A startup loan.Government-backed loans of up to £25,000 are available for startups that have been around for less than two years. They also come with free mentoring.
A standard fixed-term business loan. You’ll have a £5,000 lump sum transferred to your bank account and make monthly repayments on the balance for an agreed period. Interest rates can be fixed or variable.
A business cash advance. If your business’s income can vary dramatically from month to month, then a business cash advance can offer peace of mind through repayment flexibility. You’ll pay a fixed fee when you draw down the loan, then pay back a percentage of every transaction until your debt is cleared. This means that if business is booming, you’ll clear your debt faster, but if business is slow, it’ll take longer. Either way, it’ll cost you the same amount overall.
Asset finance.Asset finance allows you to spread the cost of assets for your business over a longer period. You can access the latest technology or vehicles and then pay for it monthly. As you’d expect, the assets can be repossessed if you fall behind on repayments.
Asset refinance.Asset refinance allows you to unlock capital in assets already owned by the business – essentially by using them as security for a loan.
If you’re looking for ongoing access to business credit, consider the following options:
Invoice finance. The two main types of invoice finance are invoice discounting and invoice factoring. With the former, the lender will use your unpaid invoices as collateral for your loan. With the latter, the lender buys your unpaid invoices from you (at less than their full value).
If you need the lump sum upfront, but still like the idea of ongoing, flexible credit, consider these options:
Business credit card. A business credit card works the same as a personal credit card. You’ll be able to make purchases and overspend by your agreed credit limit, but will be charged interest if you don’t repay your balance in full before the end of the month.
Business line of credit. A line of credit works similarly to a credit card or overdraft, as you’re given a credit limit and will only pay interest on the amount borrowed. The rates are typically higher than those associated with a more traditional business loan, but there’s more flexibility.
Business overdraft. This is another flexible line of credit that you may wish to consider, but the interest rates do tend to be relatively high and the limits relatively low.
What if I have bad credit?
Many of these products are available for businesses with bad credit, especially for amounts as low as £5,000, although you may be charged a higher interest rate.
Interest rate. The higher the interest rate, the more expensive your loan will be. Businesses with a better credit record and a lengthy history of profits will typically be able to access lower rates.
Loan duration. The amount of monthly payments you’ll make to repay your loan. As a general rule, the longer your loan term, the lower your monthly repayments will be, although you’ll pay more overall in interest.
Eligibility. Never apply for a loan without checking that the business is eligible for it. It’s a waste of time and demoralising, but what’s more, the application could be visible to future prospective lenders through your company’s credit record.
Secured vs unsecured. Some business loans require you to put assets forward as collateral to protect the lender against you going into arrears. These are called secured loans and tend to offer lower interest rates.
Flexibility. Nobody knows what’s around the corner, let alone three or four years down the line. Different types of business finance offer different levels of flexibility, and even within the same class of product, different lenders will have different policies. If your business is volatile, flexibility should be high on your list of requirements.
£5,000 loan illustrations
Interest rate of 5% fixed p.a.
Interest rate of 10% fixed p.a.
Interest rate of 20% fixed p.a.
1 year loan
Monthly: £428.04 Overall: £5,136.45
Monthly: £439.58 Overall: £5,274.95
Monthly: £463.17 Overall: £5,558.07
2 year loan
Monthly: £219.36 Overall: £5,264.57
Monthly: £230.72 Overall: £5,537.39
Monthly: £254.48 Overall: £6,107.50
3 year loan
Monthly: £149.85 Overall: £5,394.76
Monthly: £161.34 Overall: £5,808.09
Monthly: £185.82 Overall: £6,689.45
What about a broker or matching service?
Brokers and matching services allow you to instantly check which lenders would offer you a £5,000 loan, saving you time and preventing you from damaging your credit score via multiple failed loan applications.
Many of them are free because they make money via referral fees from lenders. However, a great deal of free business loan brokers don’t have access to the whole market, meaning you may not be recommended the very best deal.
Frequently asked questions
Each lender will have its own eligibility criteria, but you’ll boost your chances by demonstrating a good personal credit score and business credit score. It helps if you’ve been in business for a long time and can show a consistent history of profit. Providing collateral, applying for less money or applying for loans with a higher interest rate will boost your chances of being accepted.
There are lenders that specialise in providing finance for startups, although the best deals tend to be saved for established businesses.
It varies massively depending on the type of loan. Short-term loans for a few months are widely available. It’s also possible to get loans with terms of 10 years or more, although less so for loans as small as £5,000.
Your lender will ask what you’re planning to spend the loan on and look for proof that you’ll be able to comfortably repay it. If they’re convinced you’ll be able to repay the loan, lenders tend to be relatively lenient about what you spend it on.
Chris Lilly is a publisher at finder.com. He's a specialist in credit-based products including business and personal loans, mortgages and credit cards, and is passionate about helping UK consumers make informed decisions about their borrowing. In his spare time Chris likes forcing his kids to exercise more.
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