02: Debt finance

Short-term debt finance, such as bank overdrafts, are generally used for temporary cash flow requirements, while longer-term debt options (including loans) can help to finance new property and equipment.

If your company needs the money for more than a year for a specific purpose, a loan is likely to be more cost-effective than an overdraft. For larger loans, especially those over £25,000, some form of security is likely to be required.

New companies may, however, be eligible for the Small Firms Loan Guarantee, a government-backed scheme which encourages lenders to make loans to viable propositions that do not have security.

Debt options available are as follows:

  • Overdrafts and short-term bank loans are widely used source of funding for small to medium-sized firms to smooth day-to-day running costs.
  • Long-term loans can be a good solution for a specific purchase such as premises, machinery and equipment.
  • Hire purchase and leasing agreements allow businesses to acquire items they don’t need to own, which protects working capital.
  • Factoring allows businesses to raise money based on the value of outstanding invoices which a factoring firm issues and collects on their behalf. The factor typically pays around 85 per cent of an invoice within 24 hours of it being sent out and the remainder, less an agreed fee, once it has been settled.
  • Invoice discounting is similar to factoring, but the business controls the invoicing and debt collection processes.