A wide range of business loans are available and choosing the right one, which offers favourable interest rates and repayment terms, is crucial. Various business loans also come with different consequences if repayment terms aren’t met, so it’s vital to be aware of the risks before entering any agreement with a lender.

The most common forms of business loans include:

Secured business loans: A secured business loan is backed by assets that act as collateral in case a borrower defaults on their payments. Assets typically include high-value items like a property or a vehicle, which provides lenders with an option to seize assets in exchange for the loan they offered. However, a secured business loan approach can help you borrow more significant sums of money and secure lower interest rates due to the lower level of risk for the lender.

Unsecured business loans: An unsecured business loan means you don’t need to put up any assets to act as collateral. The lack of assets used as security means interest rates tend to be higher than with secured loans. However, unsecured business loans are typically quick to process and can be preferable to organisations that don’t own significant properties or already use assets to finance other activities. Unsecured business loans are commonly used to expand and grow an organisation, put down a deposit on a commercial mortgage, carry out refurbishments, make tax payments and refinance existing loans.

Short-term and long-term loans: Short-term business loans provide your company with a quick injection of capital for activities like hiring new employees, purchasing inventory or filling in cash flow gaps. In most cases, short-term business loans come with a repayment tenure of one to five years, depending on your circumstances. While a long-term business loan is usually paid back over several years, which allows you to have lower monthly repayments and build the long-term potential of your business. 

Working capital loans: Businesses needing help to cover day-to-day costs can do so with a working capital loan. These short-term loan options enable a company to cover its daily operations, such as paying employee wages and accounts payable. This option is particularly useful to seasonal companies that may not have regular operations throughout the year and require access to capital until business picks up again.

Equity finance: Equity finance involves raising capital by selling off a stake in your business or company shares. This business loan option enables companies to pay off a short-term requirement like an outstanding bill or to invest in future growth. By selling shares, the company sells off ownership of the organisation in return for cash. That means the business loan investor may own shares in the company, make money through dividends and, depending on the agreement, want to provide input into how it’s run. Equity financing can come from several sources, including the entrepreneur’s friends and family, selling shares to an investor or through an initial public offering (IPO), which enables companies to raise billions in capital.

Asset financing: Also known as an asset-backed loan, asset financing involves a business utilising its balance sheet assets to raise additional capital. Balance sheet assets include accounts receivable, inventory and short-term investments, which a company can use to borrow money or take out a loan. This approach differs from traditional finance options as the company offers its assets in exchange for a quick cash loan. Some companies may prefer this as the loan decision is based on their assets rather than how creditworthy a lender perceives them to be.