If you need business financing to help manage short-term needs, such as bridging a cash flow gap, buying bulk stock or starting new projects, there are a variety of financing options available. Here, we take a look at some of the most popular ones to help you determine which one is best for your business.
Business credit cards
Business credit cards are like standard credit cards, except they have higher credit limits and can be issued to multiple users. You can use them to make purchases of goods and services and then pay the cost at a later date. They can be used to build a credit profile, manage employee expenses and help manage your cash flow.
Through a business credit card, you get access to a line of credit, which can be used whenever you need it. Your limit will be determined by your credit card provider.
Benefits
- Typically available to businesses of all sizes and ages
- Very flexible: can be used for a large number of business purposes
- Some business credit cards offer additional benefits such as cash back and travel insurance
- Up to 56 days of free credit
Disadvantages
- You may have to pay an annual fee just to have a credit card
- Interest rates on credit cards can be high and are offered at variable rates
- Interest is also compounded daily, which can greatly increase the cost of the loan
- Most business credit cards require a personal guarantee
Business line of credit
A business line of credit is a bit like a credit card, but without the physical card. It allows your business to access a credit limit, which is determined by your supplier. You can withdraw funds when needed and usually only pay interest on that amount, rather than the full amount available. Lines of credit can expire after a set time or can be a revolving facility where you can reuse the funds after you’ve paid them off, without having to reapply.
FlexiPay is our line of credit product. You can access a credit limit from £2,000 to £50,000 to pay business costs, such as paying energy costs or your tax bill to HMRC, buying shares or covering payroll. There is no interest payable — you’ll only pay a flat 3% fee on each business cost. Then pay in 3 equal monthly installments, and once it’s paid off, it’s ready to go again.
Below, we’ve looked at the particular advantages and disadvantages of FlexiPay as a line of credit option.
Benefits
- No annual charges or setup fee
- Quick and easy setup – apply in just 10 minutes
- Pay each business cost in 3 equal payments
Disadvantages
- Smaller amount available compared to a standard term loan
- Not eligible if you have an immediate cost to pay when you sign up, as it may take time to receive your line of credit
Business discoveries
If you are struggling and already have a business bank account, you can use your authorized overdraft facility to do this. It can be one of the quickest and easiest options as you can set it up with your bank, and there are usually account options available for businesses of any size or age.
Benefits
- It may be simpler to set up if you already have a business bank account
- It can help you build a credit rating for your business
- Incredibly flexible – you can pay when it suits you
Disadvantages
- The amount you can borrow is usually less than other forms of short-term business finance
- The interests of arranged overdrafts can be high; if you go into an unarranged overdraft, these fees can increase substantially.
- Interest is also compounded daily, which can greatly increase the cost of the loan
- There is usually a fee to be paid to have a business bank account and overdraft facility
- You cannot receive interest on credit balances
Short-term commercial loans
Unlike standard term loans, which are offered over a longer period, short term business loans are usually available in terms between 3 months and 2 years. They can be a preferable option for companies that require a larger amount of funds, such as those looking to renovate their premises or start a new project.
At Funding Circle, we can offer our own short-term loans, which are available at Terms of 1 to 2 years. Fill out a simple application and we’ll find the right loan for your business. It only takes 10 minutes to apply and you will make a decision in as little as 1 hour. If you are approved, you can receive the funds to your account within 48 hours.
Below, we look at the pros and cons of our own short-term loan offering.
Benefits
- Available for companies that have been in business for 1 year or more
- No fees, just interest
- Loan terms are shorter, so you pay less interest, and even less if you pay it back early
- Fixed interest rates
Disadvantages
- Smaller amount available compared to a standard term loan
- Interest rates and monthly repayments may be higher
- May require a personal guarantee
Merchant Cash Advance
A merchant cash advance is a flexible facility that allows businesses that receive payments from customers by credit or debit card to borrow, with the funds ‘secured’ for future card payments. They can be useful for businesses that receive payments through a large number of card transactions, as reimbursements are taken as a percentage of future card revenue.
Benefits
- Available for companies that have been trading for 6 months
- Very flexible: can be used for various business purposes
- No fixed payments, fixed terms or security required
Disadvantages
- You must receive at least £10,000 per month in debit and/or credit card sales to be eligible for this type of finance
- Not suitable for businesses that primarily accept payments in cash or via other transfer options
Invoice financing
If you are paid a significant amount via invoices, you can also try invoice financing. As the name suggests, it is a form of loan based solely on your invoices. Your supplier buys your unpaid invoices or lends you money against the value of the accounts receivable.
As you continue to provide services or goods to your customers, you submit these invoices to a supplier who will then pay your business a percentage. Once the invoice is paid and the supplier’s service charge is covered, you will receive the rest of the sum.
Benefits
- It allows you to access the funds you owe without waiting for clients or customers to pay the amount due
- You can increase your request for funds as your income grows and decrease it when you need it
Disadvantages
- You do not receive the full proceeds from your goods or services; your provider takes a cut, including a monthly interest rate and service fees
- Invoice financing is generally not available to those selling to the public
- Suppliers will only lend against invoices due from customers or clients they expect to pay
10/17/22: While we want to help as much as we can, the information found here is provided for informational purposes only and should not be considered financial or legal advice. To the extent permitted by law, Funding Circle accepts no liability for any loss or damage that may arise directly or indirectly from the use of or reliance on the information contained herein. If you have any questions, talk to your professional advisor or seek independent legal advice.
