A guide to business loans

What is a business loan?

A business loan is a sum of money issued to a business exclusively for use in the company. The borrowed money is repaid – with interest – over an agreed loan term. From buying stock ahead of a seasonal peak to accessing new plant and machinery, business loans can be used for a range of operational and growth purposes.

How do business loans work?

Like a personal loan, you’ll need to apply for a business loan through a lender who will decide whether they want to lend to your business (and if so, what interest rate to charge). If you accept the lender’s offer you’ll receive the loan amount and begin to repay it, plus interest, on a monthly basis over the agreed loan term. 

Eligibility can depend on a number of factors, including your demonstrable trading history, balance sheet assets, cash flow position and credit history. 

How long does it take to get a business loan?

A loan can take anywhere between a few hours to a few weeks to set up. The time it takes to get a business loan depends on factors such as the type of loan and lender. For instance, secured loans tend to take longer to set up than unsecured loans. 

How much can I borrow?

Your business could be eligible for anywhere between £1,000 and £15M. Loan terms can vary from a one-month repayment up to 15 years. A business loan calculator can help you determine the cost of the finance you’re looking to borrow. 

Enter the amount you plan to borrow, the quoted annual interest rates and the term length (e.g. two years) to see how much a loan could cost your business. 

Types of business loan

The business finance market is becoming increasingly broad and diverse. Traditionally, a business would’ve consulted its bank for a loan. Nowadays, there are lots of specialist and alternative finance lenders and products to choose from.  

Business loans are usually either secured or unsecured.

Secured small business loans

Sometimes referred to as asset-backed lending, a secured business loan will require your business to provide assets – such as property or plant and machinery – as security for the loan. 

Security lowers the risk to the lender, so secured loans often have lower interest rates and better repayment terms. If you opt for a secured business loan, you’re less likely to be required to provide a personal guarantee. 

Benefits of a secured business loan include:

• Less stringent focus on credit scores

• Fixed interest rates

• Potential for early repayment 

• Often cheaper than unsecured loans

Unsecured small business loans

Unsecured business loans don’t require security. They can be an attractive option for asset-light businesses or companies that are growing fast and need quick access to capital. Unsecured loans of up to £250,000 can help with everything from working capital to business expansion. Lenders almost always ask for a personal guarantee.

Benefits of an unsecured business loan include:

• Quicker to arrange

• Access to growth capital for your business

• Faster to get funding 

• Manage market uncertainty

• Funding for unexpected bills

Is a business loan right for me?

It’s important to think carefully about business finance and you’ll need to ensure that you can meet the repayments. A loan, when used properly, can help you strengthen your position and provide you with the cash you need to reach your business goals. 

You might want to consider a business loan in the following scenarios:

• You require a cash injection to improve cash flow during a seasonal dip

• You require new equipment or want to expand

• You require additional resources to seize a new business opportunity

Pros of a business loan

• You can get cash to grow your business without having to wait for income 

• You don’t have to surrender any control over your business

• There’s flexibility in terms of what you can spend the funding on

• Fixed repayment rates

Cons of a business loan

• You’ll have to meet the lender’s eligibility criteria which can be strict

• You might be charged higher interest if you haven’t been trading for long 

• The lender might not approve you for the full business loan amount

• Negative impact on credit rating if you default

Business loan alternatives

If you’re not sure that a loan is the right solution for your business, there are a range of alternative finance types to choose from. 

If your business accepts debit and credit card payments from customers, you may want to explore the benefits of a merchant cash advance. The lender will give you an upfront cash payment  which you repay as a fixed percentage of your customer's card payments.

Asset finance lets you lease equipment or machinery for your business or pay for it over a set period of time in instalments. Whatever equipment you need, there’s probably an asset finance option out there to match – from vehicles for delivery companies to kitchen equipment for restaurants.

If your business regularly invoices for work, it could be eligible for invoice finance. 

Designed to ease cash flow problems and enable businesses to get paid faster for completed work, invoice financing can be a great way to ensure you can continue to trade and grow without being held back by cash locked up in unpaid invoices.

Finally, revolving credit facilities are a type of working capital credit that can be viewed as a flexible and open-ended business loan. 

Your business can borrow, repay, borrow again (and so on) over the course of the agreed term. As such, they can be useful if you need to dip in and out of business finance on an ad hoc basis. 

Can I get a business loan with bad credit?

Your credit rating is a valuable indicator of what business loan interest rate you'll pay for a business loan. Risk is determined by the term length and the security you can provide, as well as aspects such as your business credit rating. 

While a bad credit rating won’t necessarily rule you out, you could be rejected or have to pay higher interest. Business loans for bad credit let small business owners get the funding they need without their credit rating posing a significant hurdle. 

Improve your chances of getting a business loan

There are a number of things you can do to improve your chances of getting a loan. 

1. Check your credit report

All lenders will check your credit history when you apply for a business loan. Get a copy of your report and ensure it accurately reflects your recent transactions and lending history. Those with the most favourable credit scores will get the best lending terms, so it's worth trying to improve your credit score before applying.

2. Organise your finances

Before you apply for a new loan make sure you settle all outstanding debt. 

Good cash flow also helps. A demonstrable positive cash flow means a company's liquid assets are increasing, enabling it to cover liabilities, grow the business, pay expenses and provide a buffer for unexpected situations. 

If you already have a business loan you could explore debt refinancing; this is when you apply for a new loan or debt product with better terms than a previous agreement, and it can be used to pay down an existing obligation.

3. Check your business accounts

Most lenders will review your most recently prepared financial accounts. Accounts filed over two years ago may not be accepted, so ensure that you have accurate and up-to-date accounts filed. This should include a detailed P&L and a balance sheet.

4. Create a plan

At a minimum, you will need to explain how you intend to spend the loaned capital. If the money is for working capital, expect to be asked for more details about why you need it. Ensure that you can explain why you have arrived at the sum of money you applied for and that you can meet the planned repayments. 

How to get a business loan

If you’re ready to apply for a business loan, Funding Options can help.

We enable UK SMEs to access business loans, working directly with businesses and their trusted advisors. We’ll match you with a number of business loan options, with all quotes being subject to status and income.

Our award-winning platform, Funding Cloud(™), accurately and quickly matches businesses with the right lender and finance option for their needs. From unsecured business loans to revolving credit facilities and merchant cash advances, we work with over 120 lenders offering dozens of lending products.