Business finance facility types explained

Asset-based and cash-flow lending

An asset-based lender looks first at what it could recover if the business failed. It lends a percentage of the value of the asset securing the loan, known as the advance rate or loan-to-value. The more reliably an asset can be valued and sold, the higher the advance rate.

A cash-flow lender looks first at whether the business can afford the repayments from its profits. It sizes the loan so that profits comfortably exceed the annual interest and capital repayments, and usually tests this regularly through covenants such as a minimum cash-flow cover or a maximum leverage multiple.

Many businesses use both. Asset-based facilities often come first because they are secured on specific assets. Any profit not needed to service them can then support a cash-flow loan.

Term loans

A term loan is a lump sum repaid over an agreed period with interest. Businesses use term loans for growth, acquisitions, management buy-outs and refinancing.

• Amortising term loans are repaid in regular instalments, so the balance falls to zero by the end of the term.
• Bullet term loans carry interest during the term, with the whole principal repaid at the end. Because there are no capital repayments along the way, the same cash flow can usually support a larger loan. Bullet debt is more common in larger and private-equity-backed transactions.

Term lenders assess historical and forecast profitability and commonly take security over the business's assets.

Commercial mortgages

A commercial mortgage is a loan secured on commercial property, such as offices, a warehouse or a factory, whether the business already owns it or is buying it. The lender advances a proportion of the property's value and the loan is repaid over a long term, often well beyond the term of other business loans. Because property is comparatively easy to value, commercial mortgages are usually priced lower than other secured borrowing.

Invoice discounting

Invoice discounting releases cash tied up in unpaid customer invoices (trade debtors). The lender advances a percentage of the value of approved invoices, and the business repays the advance as its customers pay. The facility grows and shrinks with sales, which makes it useful for funding working capital.

With invoice discounting the business usually keeps control of its own credit control and collections, often without customers knowing. With factoring, a close relative, the lender runs the sales ledger and collects payment itself.

Advance rates depend on the quality of the debtor book. Sectors where invoices are more often disputed or subject to contract terms, such as construction, usually attract lower advance rates.

Hire purchase and asset finance

Hire purchase spreads the cost of plant, machinery, vehicles and other equipment over a fixed term, with the asset itself as security. The business owns the asset once the final payment is made. Leasing is a related form of asset finance in which the finance company keeps ownership.

Lenders can also refinance equipment a business already owns, releasing cash against it. Existing, used assets normally attract a lower advance rate than new assets being bought, because they are harder to value and resell.

Stock finance

Stock finance lends against inventory: raw materials, work in progress or finished goods. Stock is harder for a lender to value and sell than debtors or property, so advance rates are lower. It is usually provided alongside invoice discounting as part of an asset-based lending facility, and lenders often require a minimum level of stock and limit stock lending relative to the debtor facility.

How the calculator uses these facilities

The Debt Capacity Calculator sizes the four asset-based facilities from your balance sheet, then sizes amortising and bullet term loans from the after-tax operating profit left once those facilities are serviced. The total is an indicative estimate of debt capacity, not financial advice or an offer of finance. The methodology page sets out each step.