Getting a small business loan: Which Type Is Right for Me?

On this page:

What is a Small Business Loan?

What is Leasing?

Advantages of Leasing

What is Hire Purchase?

Advantages of Hire Purchase

What Are the Costs Involved in Asset Finance?

Which Agreement is Best for You?

Final Thoughts

If you are trying to grow your small business, chances are you may need a small business loan at some point. New equipment, new machinery and a new cash injection for taxes and payroll purposes are just a few things that go a long way in growing a business.

If you have a small business or you run a start-up, prices for many of the assets you'll likely need will have you wondering how other companies ever manage to afford such high prices.

This is where you can assess your small business loan options to help.

Packages such as hire purchase and leasing allow you to get access to what you need to get your business going with payment terms conveniently based on your cash flow. Look below at a couple of these loan-type options for your consideration process.

What is a Small Business Loan?

A small business loan is a way of borrowing money to grow and improve your business in the short term, which you can pay back over a more extended period.

Typically, business loans are paid back over several years, ranging from 1-5 years, although the terms are negotiated on a contract-by-contract basis.

"Business loans are paid back over several years, ranging from 1-5 years"

Small business loans come in many shapes and sizes, which is why we wrote this article: to cover a few of the most popular options and help you - a small business owner, director or manager - to help to choose the correct option.

If you'd prefer to speak with one of our advisors to have a chat about small business loans and ask any finance-related questions you may have, please feel free to get in touch.

Otherwise, below we have listed some of the most common business loans, detailing what each entails and the benefits.

What is Leasing?

Leasing is an agreement that grants you the use of an asset without giving you ownership of it. No actual deposit is required for a lease as payments are made similarly to rent payments. This means all that is usually required upfront is the first month’s payment. The lease is set in stone for the established period, so you must understand that you are tied for that time.

Monthly payments help you avoid finding a large sum, and as you pay for use instead of ownership, it allows you more flexibility.

Advantages of Leasing

Leasing has several advantages, which include:

• Since you don’t bear the burden of ownership, you can decide based on how much you need the asset at the end of a lease. You can renew the lease, end it, or even lease something more suitable if you so desire.
• Staying up to date with your assets is an excellent benefit of the flexibility that leasing offers. New versions of machines and assets come out, and others become obsolete. Leasing allows you to upgrade as needed when the lease for an older version ends.

"Leasing allows you to upgrade as needed when the lease for an older version ends."

• Depending on the lease agreement with the lessor, servicing your machinery may not need to be a concern of yours. Many contracts have replacement, maintenance, and repair clauses that save you on costs. Therefore, all you need to worry about is using the assets to improve your business.

What is Hire Purchase?

Hire purchase is an asset financing agreement that grants you access to assets with convenient payment terms like leases do. The difference, however, lies in the fact that there is usually intended to own the asset once all payments in the agreement have been made. Once this takes place, ownership is transferred to you.

A deposit is usually required for hire purchase, and it is usually 10-20% of the asset’s value. This amount is required upfront and is non-negotiable. You should note that though you get to pay with convenient terms, hire purchase agreements result in your paying more for the asset than its value. This can be as much as 25% more than the worth of the investment.

Advantages of Hire Purchase

Hire purchase also has advantages for a small business, and these include:

• No overdraft, loan, or favour needs to be taken to get cash for an asset as you no longer need to worry about covering the whole cost at once. Affordable monthly payments ensure that you don’t need to overextend yourself.
• No collateral is required in a hire purchase agreement as the asset is security.
• When you pay off the contract, you legally become the asset owner, which means you can use it freely with no more payments, and you can resell it for a lump sum. However, it would be best to account for depreciation, so the asset's value when the contract ends is less than what it had when your agreement started. Be that as it may, you still get some return on your investment in the asset, which is not the case with a leasing agreement.

What Are the Costs Involved in Asset Financing?

Beginning with leasing, there are no hidden costs with a lease. No deposit or processing dee is required, and the price usually boils down to the agreed monthly payment. This makes accounting calculations fixed and ready to manage.

As stated before, a hire purchase does have a deposit, which can be as much as 20% of the asset. There is also interest charged on the item's value that is calculated at the beginning of the agreement and spread throughout your monthly payments.

Which Agreement Is Better for You?

There is no single answer about which of these agreement types is better for you. It depends on your unique situation and what you need.

For example, if you are interested in owning an asset to resell it possibly, you may want to purchase a hire. The payments in such an agreement are finite, and when they end, the support is yours to use or sell as you see fit. You do not own an asset you lease unless you are offered the chance to purchase it when its lease ends.

If you are more concerned with just using an asset and you want to have the flexibility to swap it or not have to deal with it in the future, you can elect to go for a lease as it facilitates this.

Final Thoughts

You should know a few variables that affect a lender's decision on if you are suitable for asset finance and on the terms. These are:

• The asset being purchased/leasing
• The value of the asset at the end of the contract
• The deposit amount
• The length of the contract
• The credit score your company has

Ready to apply for finance? Click below to find out how much you can borrow.