Finding the best loan for your business

Business loans are a useful credit product for businesses. Our guide goes through how they work and what to look out for to get the best deal.

What is a business loan?

A business loan is a bank loan exclusively for businesses that work similarly to a personal or secured loan. They’re sometimes referred to as SME loans – with SME standing for Small to Medium Enterprise – or commercial financing, but whatever the company’s size, they’re funds borrowed to finance a business.

There are different types of business loans, but essentially they all involve borrowing a sum of money from a bank or lender and repaying it with interest over an agreed time period.

What are business loans used for?

All types of companies use business loans, from commercial enterprises to charitable organisations.

Commercial financing can be used to:

  • Purchase equipment, stock or machinery
  • Improve cashflow
  • Expand your business
  • Merger or acquisition
  • Buy, move or improve premises
  • Startup a business

What are the different types of business loans?

There are two main ways to obtain a loan for your business. The best type of business loan for your company will depend on the financial position of your enterprise and the risks you are prepared to take.

Secured business loans

Secured commercial lending, also known as asset refinance, lets you borrow against an asset. The collateral could be:

  • a commercial property
  • your own home
  • other residential property
  • machinery or equipment

Secured business loans are less risky for lenders, so interest rates tend to be lower, and repayment terms are more flexible.

However, if your business gets into difficulty and you cannot repay the loan, the asset you’ve provided as security will be sold to recover funds. Although a secured business loan may be the cheapest way to borrow for your business, it’s also the riskiest.

Unsecured business loans

This type of business lending isn’t secured against property or a commercial asset, and because of this, unsecured loans are usually subject to tougher affordability criteria. If you need a quick business loan, this is a better option.

Here are some unsecured business borrowing methods you may come across:

Commercial bank loans: This is the most popular type of business loan and tends to be offered by major high street banks and online lenders. Traditional bank loans can be more challenging to secure than other types of business financing, but they are still the most favoured option for small businesses (SMEs) and established businesses with good credit ratings.

Working capital loans: This is a loan to support a company’s day to day operating costs rather than a purchase or investment. They’re normally repaid within a year, so are short term loans. They’re suitable for businesses with fluctuating earnings or variable income.

Peer-to-peer loans: Also known as P2P lending, this type of loan matches inclined lenders with businesses seeking loans. It’s a lending platform, so no banks are involved. P2P rates can be preferable, but eligibility criteria can be restrictive.

Short-term business loans: This is simply a company loan taken for several months, instead of years. Applications are often more straightforward, and it’s ideal if you need an instant business loan to solve a cash flow problem, but bear in mind that interest rates can be high.

Business bridging loans: A type of short term loan for businesses to ‘bridge the gap’ when commercial finance is needed quickly. Business bridging loans are secured against commercial assets and can be used to buy business premises or fund an enterprise.

How to get a business loan

There is a range of business lenders to choose from in the UK. Traditionally most businesses would turn to a high street bank or building society, but there’s much more choice now.

Your business can borrow from a:

  • High street bank
  • Building Society
  • Direct lender
  • Online broker
  • P2P lending platform
  • Credit Union
  • Crowdfunding source

The Government-owned British Business Bank and its subsidiary, the Startup Loans Company, is also a low-cost loan option for business startups.

What do you need to apply for a business loan?

This will depend on the lender. It’s likely a business loan from a high street bank or from the government will require more documentation than an online business loan.

Have these items to hand if you’re thinking about applying for a business loan:

  • Proof of identity, e.g. passport or driving license
  • Proof of current and previous addresses, e.g. utility bills, credit records

You may also need information about your business, such as:

  • Business bank statements
  • Monthly and annual turnover, e.g. Financial accounts
  • Record of trading and past performance
  • The market outlook of your sector, e.g. a business plan
  • Projected turnover in the next 12 months
  • Evidence of any business assets
  • Director and shareholder details

You will also need to declare whether you have ever been declared bankrupt or received a County Court Judgment (CCJ) or Court Decree.

Who is eligible for a business loan?

All types of traders are eligible to apply for a business loan. The following type of business can apply for commercial finance:

  • Sole traders
  • Partnerships
  • Limited companies
  • Small & medium enterprises (SMEs)
  • Large firms and corporations
  • Charitable organisations
  • Social or not for profit enterprises

The usual eligibility requirements for borrowing in the UK apply, such as being over 18, being a UK resident and operating a UK based business; however, lenders will also set their own eligibility criteria.

Whether you choose to borrow from a high street bank, direct lender or apply via a broker, your suitability will depend on information such as:

  • Your annual turnover
  • How long you have been trading
  • Your business credit rating
  • Your personal credit history
  • Your ability to repay the loan
  • Your business assets
  • Projected turnover and outlook

How much can you borrow with a business loan?

It depends on your enterprise’s size, turnover, and nature, but typically you can borrow between £1,000 and £500,000. However, larger amounts may be available through specialist brokers.

The term of the loan can be anything between 1 month and 25 years.

The interest rate will depend on whether you opt for secured or unsecured business finance and the type of business loan you require.

What are the advantages of taking out a business loan?

Taking a business loan can provide lots of benefits if a business is encountering cashflow issues, planning on expansion, or simply wanting to purchase new equipment or another vehicle.

An injection of cash can kick start a fledgling business or stop a company from going under because of circumstances outside your control. A business loan also gives you more control of your business rather than relying on outside investment.

However, the best business loans have low-interest rates, reasonable terms, and flexible repayment, so shop around to find the best business loan.

Opt for a reputable company that is FCA regulated if possible, and make sure you know the total cost of the loan and check the fine print carefully before signing any credit agreement.

What are the disadvantages of taking out a business loan?

The downside of taking a business loan is that your business and all the directors will have to undergo financial credit checks, and you’ll be expected to provide a lot of information about your business when you apply.

You may also have to give regular updates about your company’s performance and be accountable to your lender.

If you borrow from an online direct lender or business loan broker, interest rates may be very high so make sure you understand the costs of the loan and any extra fees you’ll be expected to pay.

You may also find the terms of repayment are not very flexible. If you want to pay off the loan early or need a repayment holiday, you could be saddled with hefty fees.

Are there any alternatives to business loans?

There are some alternative avenues of credit to consider if you’re having trouble securing a loan for your business.

Lines of credit: This offers companies the option of borrowing money up to an agreed credit limit. Interest is only paid on the balance owed, so it can be helpful for solving cash flow issues. However, interest rates can be high, and a credit line could create a false sense of security.

Merchant cash advance: This is a form of cash advance for businesses that are repaid automatically when a business takes a card payment from a customer. This tends to work well for businesses looking for a loan with bad credit.

Invoice financing: This type of financing involves selling your unpaid invoices to an investor or broker who gives the value of the invoice to your business immediately in exchange for a fee. It’s a flexible form of credit and a good way to quickly access money owed to you.

Asset-based finance: This lending enables you to acquire business assets such as equipment or vehicles without buying them upfront. Asset financing also lets you release cash from business assets you already own or use your existing assets such as property or machinery as security.

Government Start-Up loans: These are personal loans for new businesses that can’t get a traditional business loan, usually for established businesses. You can borrow between £500 and £25,000 to start or grow your business. There are stricter eligibility criteria, but interest rates are low and come with free business mentoring.

Business loans FAQs

Can I get a business loan with bad credit?

Yes, although it will be more difficult to get credit from a high street bank or building society. An online credit broker or alternative lender may be able to help, but you may be given stricter repayment terms and a high rate of interest.

How long does it take to get a business loan?

Many online lenders will be able to give you an instant decision, and some lenders may offer quick business loans, which means if your application is approved, you can get the money in your account within 24 hours.

Will a business loan affect my personal credit rating?

It depends. Some lenders can pre-approve business loan applications with a soft credit check. A soft check allows banks, brokers and direct lenders to check your creditworthiness without affecting your credit rating.   

However, applying for multiple loan applications could affect your credit score, so it’s best to use a broker if you have bad credit or are not confident of approval.

If you’re hoping to repair your credit score, paying back a business loan on time and in full each month can help build your credit score and improve your credit rating.

Are business loans regulated?

No, not necessarily. Although many traditional lenders will be regulated by the Financial Conduct Authority (FCA), it is not a legal requirement, so business lenders do not owe a duty of care to their borrowers.

What is APR?

APR is short for Annual Percentage Rate, and it shows the overall cost of your loan. 

Any extra fees or charges are added to the loan amount before APR is calculated.

It’s a legal requirement for credit lenders to show their APR so an easy and fair comparison of interest rates can be made between lenders.