If you are keen to grow your business with commercial funding, you’ll have likely come across all types of products, all with their own benefits and of course, downfalls too. Finding the right fit for your SME is a task that should be taken seriously and no doubt a decision that will be made with time and plenty of due diligence.
Whilst exploring the various options available to you as a business owner, you'll have probably encountered the term 'property finance'. This type of funding falls under secured lending as the loan is provided under the proviso that property is used as collateral should repayments become a problem.
Secured business loans are a popular choice with SMEs as they bring with them a wealth of benefits. By using an asset to secure the finance needed to grow or sustain your business, you will be able to access much larger amounts. With the added security of an asset or a portfolio of assets, lenders are able to provide much larger loan amounts.
However, larger loans are not the only benefit of taking out a secured business loan. Alternative lenders like Nucleus also offer longer repayment terms, better interest rates and are able to work with businesses that have historically not always excelled as far as credit ratings are concerned.
You might have already realised that a secured commercial loan is the right kind of funding for your business and perhaps property finance is the best fit, certainly if your business lacks a large portfolio of assets to use as leverage – but identifying which type of property finance is best for your individual SME is sometimes the most confusing part.
To help you better understand the different types of property finance, our team have discussed the three approaches to property finance that Nucleus offer below.
What Is an Interest Only Property Loan?
For businesses that need access to funds without the burden of large monthly repayments, our interest only property loan could provide the perfect funding solution. The majority of our interest only loans last for a duration of two years, with many of our customers choosing to refinance with us once the term end approaches, however terms can last up to five years.
Your business will be required to pay a small monthly interest amount, but when compared to the monthly repayments usually expected with a term loan, the fee is a lot less. When the loan term ends, you can either pay one last month’s interest plus the loan amount or refinance your loan with Nucleus or another lender.
SMEs that choose to take out an interest only property loan benefit from having access to a large sum of money to grow and improve their business, with the pressure of repaying it back postponed until the end of the term.
With this in mind, the interest only loan Nucleus provide is one of the most viable start up capital opportunities available to potential new businesses. Once a property valuation is complete and the loan amount is secured against a first or second charge on a property you own, the funds will typically be in your account within two to three weeks.
What Is a Term Loan?
As far as secured lending goes, a term loan is what is ‘typically’ expected when a business applies for a secured commercial loan. Before everything is finalised, Nucleus will clearly outline the exact loan amount and how much you will be expected to pay on a monthly basis.
Terms for this type of loan last up to seven years and the aim is to pay the loan back, plus interest, in equal monthly payments until the full loan amount is cleared. By gradually reducing the loan amount, businesses are able to comfortably borrow without the worry of needing to pay a huge sum back in future.
Term loans tend to have better interest rates than other more short-term loans which is why they are typically a popular choice for SMEs.
This approach to borrowing is great for businesses that are consistently making good profit margins as the fixed amount enables businesses to borrow funds to grow whilst also sustaining financial stability.
This type of property finance is also suitable for start ups and some businesses choose to opt for fixed monthly payments from the start so they can avoid the need to pay a large lump sum at the end of the loan term. Most businesses prefer the predictability of term loans and a welcome benefit of this kind of lending is that it allows a business to build its credit score whilst becoming more disciplined with financial management.
At Nucleus, we ask for a cash flow forecast and a business plan if you plan to use the loan for start up capital.
What Is a Bridging Loan?
Unsurprisingly, a bridging loan is a commercial funding source that is used by businesses primarily to "bridge" a financial gap. This type of product falls under short-term borrowing and terms can last up to two years with Nucleus.
SMEs utilise this kind of business funding when they already have a plan in place to access additional funds but need working capital immediately. An example of this could be that your business is in desperate need of securing a new business premises, but if you are in the midst of the drawn out process of having a mortgage application approved, a bridging loan would allow your business to make a property purchase now.
One of the greatest benefits of this type of loan is that your business would not be required to pay a fixed amount monthly. It would instead be expected that your business would pay off the loan plus interest once the end of the loan was reached in one 'bullet' payment.
At this point, your business can either decide to wipe out the loan and continue operations without any additional funding - or can instead choose to refinance and take out a long-term commercial loan moving forward. The extra time to find more viable long term funding options is often a welcome perk for SMEs as it enables businesses to get the best loans, at the best prices with the most favourable conditions.
It is important that you do your research to establish which type of secured commercial loan is best for your SME and we always recommend that businesses allow themselves enough time to find the funding line that works best for them. With so many options available to businesses in today's lending landscape, your business has ample opportunity to access working capital at a fair rate with conditions that suit its needs.
For more SME advice and tips, read our related posts below. If you are experiencing cash flow challenges or want to realise your business growth plans, get in touch with our team of Funding Specialists today on 020 3820 6972 or email firstname.lastname@example.org.
2 December, 2019