The Different Types Of Finance
From time to time you may want to buy an expensive piece of equipment or a motor vehicle for your business. Depending on the financial state of the business you may need to raise extra finance. One method is to approach your bank. If you only want short-term finance (up to a year) you will probably do best to try and negotiate an overdraft facility. But if you need finance over a longer period then your options are:
- bank loan (as distinct from overdraft)
- hire purchase
- asset leasing.
There are many variations on these options. Your choice will depend upon several factors:
- the period of the finance required
- the nature of the asset to be acquired
- interest rates, and what they will cost.
If you are buying property then a loan from a bank or other financial institution is probably the only real option. Of course, you may be able to rent premises but you will never become the owner.
For other assets you may be able to use any of the methods of finance. Let’s examine them in turn.
Bank Loan (Often Called A Development Loan)
The bank makes you a loan so that you can buy the asset. The interest and repayments can be handled in various ways; for example:
Fixed Interest, Fixed Repayment
The interest rate will be fixed at the start of the loan and will stay the
same for the whole period of the loan. The repayments can also be set at a fixed amount (e.g. per month).
Fixed Interest, Reducing Repayments
The interest rate is fixed at the start of the loan. The payments then made to the bank consist of two parts: the repayment of a fixed proportion of the sum originally borrowed, plus payment of interest at the agreed rate on the outstanding (and reducing) balance. For example:
Loan £6,000 over 5 years at 8% interest with monthly repayment of capital £100