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They say that it takes money to make money, and a line of business credit can indeed open the doors to new investments. However, before you borrow money it’s important to understand all your options as well as their pros and cons. Here’s a closer look at the main types of credit available for UK businesses to help you decide.
What is business credit?
Business types of credit might vary in terms of structure and pricing, but at the core they share the fundamental arrangement. A business borrows money from a lender, agreeing to repay it with interest over time. Examples of business credit include everything from bank loans to credit cards, with availability based on your credit history and score.
Business credit is separate to personal credit, though some lenders will review your personal credit as part of a new business credit application. It’s worth building a positive repayment history in both areas to access the best offers. To get started, you must create a legal business entity and open accounts that report its payment history to applicable business credit bureaus.
What types of credit are there?
There are three main types of credit that UK businesses can apply for.
1. Business line of credit
The first option is a business line of credit, which comes with a specific limit. Your business can take out a single loan or multiple smaller loans, provided the total is below this credit limit. Businesses only need to pay fees or interest on the amount borrowed rather than the full line of credit. A business credit line is an example of revolving credit, which means you can borrow repeatedly from the same account.
For example, imagine that you take out a £5000 line of credit. You borrow £1000 to pay for business supplies, which is transferred from the lender directly into your bank account. You’ll then need to repay the £1000 plus interest. Once this amount is repaid, you still have access to the full £5000. Repayments are flexible in comparison to business loans or credit cards, which usually require fixed monthly minimums.
There are two types of lines of credit:
Secured credit lines require your business to use assets as collateral, which can be taken by the lender if you fail to repay the money.
Unsecured credit lines do not require the use of assets or other collateral. They usually have lower limits and higher interest rates to mitigate lending risk.
2. Business loan
The second type of credit to consider is a traditional business loan. The terms are less flexible in comparison to a business line of credit. If a loan application is accepted, you’ll receive the full amount you wish to borrow upfront. You’ll then need to repay this lump sum over time, with added interest.
There are several types of loans. Some are set up to pay for specific equipment, property, or development. They use the asset you’re purchasing as collateral while you repay the loan. Terms and conditions vary widely when it comes to business loans, depending on the lender, your credit history, and the size of the loan. Some require you to sign a personal guarantee to repay the loan if your business entity is unable to make all payments.
3. Business credit card
The third main option for business is a credit card. Using a business credit card keeps your business and personal finances separate, while helping you build your business credit history. For the short term, they’re a potentially useful way to manage cash flow and expenses.
Like a business line of credit, they give you access to a set limit of money that you can take out all at once or in smaller amounts. However, repayment plans are less flexible. You’ll need to make a monthly minimum repayment to the credit card company. Furthermore, interest fees are often higher in comparison to other types of loans or lines of credit.
What type of credit is best for your business?
With so many different types of credit out there, how can you choose the right one for your business? To begin with, think about your immediate needs. Do you need a short-term loan to secure a specific asset, or a more flexible line of credit? What is your credit rating like? If you have bad credit, you’ll need to compare interest rates, terms, and conditions more carefully to avoid overpaying.
Businesses that need to borrow throughout the year – such as those with seasonal income – could benefit from a flexible credit card or line of credit. Eligibility will vary widely, so shop around before entering any new credit agreement.
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