Struggling to find the right loan for your business?
Find out exactly how to choose the best business loan for you.

Business loans

There are plenty of reasons why you might need a loan for your business. But whether you need cash for a new contract, or for an unexpected expense, there are so many different types of business loans available that it can be difficult to know where to start. Business loans are specifically designed for commercial organisations and can range in value from between £1,000 to £3 million. The payback time can range between 1 month to 15 years. So, there's plenty of scope, meaning that you should be able to find a loan that's just right for your needs.

In This Guide:

Can my business get a loan?

Most businesses are eligible to get a loan, but your options could be limited by the type of business you have. For instance, government start up loans are now only available for new businesses. Meanwhile, you must have already been trading for a set time in order to get a cash advance loan.

Lenders only need to be regulated if they're offering loans to limited companies. So, some lenders that only deal with sole traders could be unregulated.

There's no limit to how many loans you can take out for your business, except that you need to be able to show the lender that you can afford each loan when you apply.

Secured vs unsecured

All business loans fall under one of two categories. An unsecured loan allows your business to borrow money, without the risk of losing your assets by using them as security. Under a secured loan, you use an asset as security. So, if you don't pay back your loan, the lender can seize your asset for resale. This is how asset finance works.

What types of business loans are out there?

Bank loans

Bank loans are cash loans that are offered by building societies and banks. Your business borrows a fixed lump sum, then pays it back over a specified period of time. Most bank loans need a directors' guarantee, which means that if your business can't pay the loan back then the director is personally responsible for the debt.

Revolving credit facilities

A business credit facility allows you to borrow money whenever your business needs it. You only pay interest on the amount that you withdraw, and you can pay it back whenever you can afford to do so.

Peer to peer

This is a sort of social lending, offered by online platforms. You borrow money from investors that are looking for a return on their money. Just like with bank loans, peer to peer lenders might ask you for a directors' guarantee when you apply for a loan with them.

Short term

A short-term business loan normally only lasts a few months, but sometimes you could potentially borrow for just a few days. Some short-term lenders charge interest monthly rather than annually, so you should double check that you know exactly how much the loan is going to cost you before you apply.

Asset backed

An asset backed loan is a secured loan which is backed by a business asset. This can be a good option if you're looking to borrow a larger amount of cash, as you tend to be able to borrow more with this type of loan than with others. You can use assets such as machinery, property, stock or land to back your loan.

Invoice finance

Invoice finance works a little bit differently to a normal cash loan. Instead of lending you a lump sum, your lender buys outstanding invoices from your business for a fee, releasing the money that you're owed by your customers. Banks, building societies and specialist companies all offer invoice finance. There are two different types of invoice finance:

  • Factoring: this is where the lender manages your sales and collects the money directly from your customers.
  • Invoice discounting: This is when the lender releases funds before your invoices are paid. You then owe the outstanding balance to them.

Working capital

This type of loan is designed to help you to pay for the everyday running costs of your business, for example paying employees' wages, rather than other long-term investments. Just like bank loans, most working capital loans require a directors' guarantee.

Cash advance

Under this type of loan, you borrow money against your future debit or credit card sales. They often don't quote an interest rate, because the amount which you pay back is dependent on your card takings. Instead, there is set fees at the start of your loan, and daily charges until all of the money is repaid.

Government start up

These are government backed loans which are designed for startup businesses. They offer a mixture of low rate loans and grants to new businesses. If you're a new business, then you could potentially borrow up to £25,000 and pay it back over one to five years.

Choosing the right loan for your business

To make sure you're getting the right loan for your business, you should do the following:

  • Work out exactly how much you need to borrow. You should get costing estimates for your new projects and purchases, so that you don't borrow too much or too little.
  • Choose the right type of loan. This will depend on your type of business, and on how much you need to borrow.
  • Search for the cheapest option. Don't just go with the first lender you find. You should shop around and compare the total cost of borrowing from different lenders before you apply for a loan.

How to pay your loan back

When your loan has been approved and the funds have been transferred to you, you need to start paying it back. Your method to pay the loan back depends on the type of loan that you've chosen. Some common methods include:

  • Direct debit
  • Standing order
  • Direct for outstanding invoices (this normally applies to invoice finance)
  • A set percentage of your card takings (this normally applies to cash advance loans)

If your business can't pay a loan back, then the lender will normally charge you a fee, and you may have to pay more interest as well. The lender will also register the default on your business' credit history, which will make it more difficult for you to secure finance in the future.