A business can borrow in more than one way, and each way commits it to something different.

What it's for

A term loan gives you a set amount of money upfront, which you repay in instalments over an agreed period. Each instalment usually covers both interest and a slice of the capital, so the balance falls steadily until it reaches zero. It suits a specific, costed need, such as buying equipment, fitting out a space or funding a one-off piece of expansion, where you know the amount you need and want repayments set against a fixed schedule.

What it typically requires

A lender will usually ask for the following before agreeing a term loan.

• Trading history and management accounts covering recent periods
• A cashflow forecast that runs for the length of the loan
• A personal guarantee from directors, particularly where the business has little of its own to secure the lending against
• Security over the specific asset the loan is funding, as an alternative to or alongside a guarantee

For a sole trader or a partner, a guarantee adds little beyond the liability they already carry personally for the business's debts. For a partnership, signing one can extend that liability to every partner named on it.

What it costs to exit

Paying a term loan off before the end of its term usually costs something. The lender has built its return around the full period, so settling early can trigger an early repayment charge, worked out either as a fixed number of months' interest or as a percentage of what's still outstanding. Checking this figure against the loan's own terms before signing is the only way to know whether a future cash windfall can actually clear the debt without a penalty eating into it.

Where it goes wrong

The common failure is a mismatch between the loan's term and the life of what it's funding. Equipment or a contract that runs out before the repayments do leaves you paying for something that's already gone, or paying through a quiet period with no income to match it. The other common failure is agreeing repayments against a forecast that turns out optimistic. Once the schedule is fixed there's little room to flex it, and missed instalments are usually the point at which the lender starts recovering the debt, including from a guarantor where one was given.

What it's for

An overdraft is a borrowing limit attached to your business current account. You draw on it only when the balance needs it, and you repay it as soon as money comes back in. It suits short gaps between paying out and getting paid, such as covering wages a few days before an invoice clears. It is not built for buying equipment or carrying a long project, because the lender can ask for the drawn balance back at short notice.

What a lender typically asks for

Most lenders set the limit against what actually moves through the account, so they want to see its trading history before agreeing one. A personal guarantee is often asked for alongside the facility, particularly where the business is a sole trader or a small partnership, and what signing one commits you to is worth reading on its own terms. The limit is usually reviewed once a year, and the lender can reduce it or withdraw it at that review.

What it costs to exit

There is no fixed term running down in the background, because the facility sits on the account. Closing it means clearing the drawn balance and ending the arrangement. The cost that catches people out is the interest on whatever is drawn, which keeps building for as long as the account stays overdrawn.

Where it commonly goes wrong

The facility can be reduced or withdrawn at the point the business needs it most, because the lender's review does not wait for a convenient moment. A business that has come to treat the overdraft as working capital can find itself without the cash it was counting on. That difference is also what separates an overdraft from a revolving credit facility, which is built to be drawn and repaid repeatedly.

What it's for

A revolving credit facility gives a business a limit it can borrow against, repay, and borrow against again. Cashflow in most businesses moves in waves, a busy month followed by a quiet one, a supplier paid before a customer settles, and this kind of facility sits under that movement. You draw what you need when a gap opens and repay it once the money comes in, and the limit becomes available again as soon as you've repaid it. That's the feature that sets it apart from a loan, where the sum is fixed and spent once.

What it typically requires

A lender sets the limit by looking at the business's trading history and how its current account behaves month to month, usually asking for recent accounts or management figures. Where the business is a limited company with a short trading history, the lender commonly asks a director for a personal guarantee before agreeing the limit, which is covered as its own sequence of events elsewhere. The limit itself is usually reviewed at set intervals, so what's agreed now isn't necessarily what's available in a year.

What it costs to exit

Interest is normally charged only on the amount actually drawn, so an unused facility costs little to hold open. Closing it means repaying whatever is drawn at the time, and ending the arrangement before an agreed term can carry a fee set out in the facility agreement. Reading that agreement before signing is the only way to know what closing early will actually cost.

Where it goes wrong

The common failure mode is treating the facility as permanent working capital, drawing it down and never fully repaying it, until the limit sits maxed out with nothing left for the next gap. The other is assuming the limit is guaranteed to stay in place: most revolving facilities can be reviewed or reduced by the lender, and a business relying on one as its only buffer can find that buffer smaller than expected at the point it's needed most. Every other instrument this site covers follows the same structure, so you can check how a term loan or an overdraft compares on the same four points.

What it's for

Asset finance pays for a specific piece of equipment or a vehicle, and the thing bought becomes the security for the loan. Hire purchase is the common form: the business uses the equipment from the start of the agreement, makes fixed payments over an agreed term, and takes ownership once the final payment clears. A van, a machine tool, a fleet of delivery bikes, these are the kind of purchases this type of finance is built around. A business that knows which asset it needs, and can point to the asset's resale value as part of what secures the loan, is well placed to use it.

What it typically requires

The lender usually asks for a deposit paid upfront, a trading history for the business, and the asset itself held as security for the length of the agreement. A newer business, or one with a thinner trading record, can be asked to add a personal guarantee on top, a promise that if the business cannot repay, the director will. The asset's expected working life is checked too, since the lender wants the agreement to end before the equipment is worn out or obsolete.

What it costs to exit

Settling a hire purchase agreement early usually brings a rebate on the interest still owed. Some agreements carry a final payment beyond the regular instalments, often called a balloon payment, which has to be cleared before ownership passes to the business. Ending the agreement before the end of term can mean handing the asset back, depending on how the contract is written. Reading the settlement clause before signing is the only way to know which of these applies to a given agreement.

Where it goes wrong

The asset is the lender's security, so missing payments can lead to repossession of the equipment or vehicle the business needs to keep trading. A business that borrows against an asset depreciating faster than the payments fall can end up owing more than the asset is worth if it has to sell or hand it back partway through. Tying the agreement to one machine or vehicle also leaves a business stuck with payments on equipment it has outgrown or stopped needing. Matching the term of the agreement to how long the business will actually use the asset avoids most of this.

You've done the work and sent the invoice, but the customer's terms give them thirty, sixty, sometimes ninety days to pay. The job is finished, the cost of doing it has already left your account, and the cash you're owed is sitting in someone else's payment run. Invoice finance is a way of borrowing against that gap: a lender advances you most of the invoice value now, and takes a fee when the customer eventually pays.

What it's for

Invoice finance exists to close the time between delivering work and being paid for it. It suits a business whose customers are themselves other businesses on standard payment terms, because the invoice is the security the lender is advancing against. It doesn't suit a business that sells to consumers, or one that invoices rarely and in small amounts, because there isn't enough of a pattern to lend against.

There are two main versions of it. In factoring, the lender takes over collecting the invoice directly from your customer, so your customer knows a finance company is involved. In invoice discounting, you keep collecting payment yourself and your customer never sees the lender at all. Which one suits you depends on whether you're comfortable with customers knowing the arrangement exists, and on how much control you want to keep over the relationship with them.

What it typically requires

A lender will want to see a spread of customers, because concentrated risk in a single payer makes the advance harder to price. It will also want invoices that are genuine, undisputed and issued to other businesses, since the whole arrangement depends on that invoice being collectable. Most lenders ask to see a history of invoicing and payment patterns before setting terms.

What it costs to exit

Invoice finance is usually structured as a running facility, so leaving it means unwinding the whole arrangement. A business that has grown used to drawing against invoices as they're raised can find cashflow tightens sharply in the weeks after stopping, because the advances that were topping up working capital stop arriving at the same time the facility fee does. Reading the notice period required to end the agreement, and planning for the gap it leaves, matters more here than with a fixed-term loan.

Where it goes wrong

The common failure isn't the facility itself, it's what it hides. Because the advance arrives as soon as the invoice is raised, a business can keep operating for months against customers who are slow payers or who never settle at all, without the usual pressure of an empty bank account forcing the problem into the open. When a customer disputes an invoice or simply doesn't pay, the lender can reclaim the advance from the business, so the risk sits with you even after the cash has already been spent.

A merchant cash advance pays a business a lump sum up front, and the lender takes repayment as a fixed share of card sales from that point on.

What it's for

It suits a business with steady card takings and a short-term need for cash, such as buying stock ahead of a busy period, covering a VAT bill, or bridging a gap before a larger order is paid. It works against sales a business is already taking through its card machine or payment processor, so it fits a retailer, a café or a salon more naturally than a business that is mostly paid by invoice or bank transfer.

What it usually needs

A lender wants to see a consistent run of card takings, usually over several months, through the business's existing card machine or payment processor. The advance is sized against that history, so a business with a short trading record or patchy card volume will find the amount on offer limited by what its receipts can support.

What it costs to get out of

The total to repay is fixed when the advance is agreed, as a factor applied to the amount borrowed, and that total does not fall if the business repays early in the way interest on a loan would. The share taken from each card payment stays the same whatever the month's takings turn out to be, so a slow month simply stretches the repayment period.

Where it goes wrong

Because the deduction is tied to card sales, a business that has a quiet trading spell finds the share still being taken out of whatever cash does come in, right when it can least spare it. The most common trouble comes from taking a second advance to repay the first, which leaves two deductions running against the same card takings and shrinks the cash the business keeps from every sale.

Trade finance is money that sits in the gap between the point you have to pay a supplier and the point your buyer settles up. If a buyer takes weeks or months to pay but your supplier wants payment now, or on delivery, that gap has to be covered somehow, and this is one way of covering it.

What it's for

The money pays the supplier, in part or in full, so the order goes ahead without you finding the cash from your own working capital. It's tied to a single purchase or contract rather than sitting in your account as a general cushion, which is what separates it from an overdraft or a revolving credit facility.

What it typically requires

A lender wants to see a confirmed purchase order or sales contract, and will look closely at your buyer's standing as much as yours, because it's the buyer's payment that closes the facility out. Where the deal crosses borders, the arrangement often sits alongside a letter of credit or a similar instrument that gives the supplier its own assurance of payment.

What it costs to exit

The facility is built around one transaction, so it normally closes itself once the buyer pays and the supplier has been settled. Fees are charged against the value and the length of that single deal, so a transaction that runs on longer than expected costs more to carry.

Where it goes wrong

The common failure is a buyer who pays late or doesn't pay at all. You remain liable to the lender who paid your supplier whether or not your buyer comes good, which is why the lender's attention is on your buyer's creditworthiness as much as your own.

A government-backed scheme does not lend you money directly. It is a guarantee the government gives to a commercial lender, covering part of what the lender loses if you cannot repay. The loan itself still comes from a bank or another lender, on terms that lender sets.

The guarantee runs to the lender.

Because the government's promise sits behind the lender, your own debt is not reduced by it. If the business cannot repay, the lender is still owed the full amount, and it can still pursue repayment from the business and from anyone who has given a personal guarantee. The scheme changes how much of that loss the lender absorbs. It does not change how much you owe.

What it changes about who gets considered

A lender taking on a smaller share of the risk can afford to say yes to businesses it would otherwise turn down: a shorter trading history, thinner security, a newer venture. That is the practical effect of the guarantee. It widens who gets a hearing. It does not remove the lender's own assessment of the business or the borrower, and a scheme-backed loan is still declined where that assessment says no.

What it does not change about a personal guarantee

Government backing does not replace a personal guarantee, and most lenders using a scheme still ask for one on their usual terms. Schemes have in the past limited what a lender can take as security against a guarantee, for example ruling out the main home for the scheme-backed portion of a loan. That protection is set by each scheme's own rules and changes as schemes are replaced, so it is worth checking against the current scheme before you sign.

Schemes replace each other

The Growth Guarantee Scheme and the schemes before it have not run on fixed, permanent terms. Each has had its own eligibility rules, its own share of the loss guaranteed to the lender, and its own closing date set by government. A scheme named today may have closed or changed its terms by the time you come to borrow, so the name is a starting point for checking the current rules, not a substitute for it.