Small Business Finance

Secured business loans

A secured business loan is when the borrowed amount is protected by an asset, known as collateral. It can be either a personal or business asset, like a property or machine, but the asset will be seized if the business is unable to repay the loan. The upside of increasing the borrower’s risk is that it reduces the lender’s risk, leading to lower interest. Invoice finance and asset finance are types of secured business loans.

Best use: Suited to long-term investments where a lot of capital is needed or for consolidating debts.

Loan duration: Typically between 1 and 10 years, but sometimes longer.

Eligibility criteria: Must have a high-value asset and over 3 months of trading history. UK registered with a good credit history.

Pros: Access high borrowing amounts at lower interest rates. Longer repayment terms can also bring structure and predictability to growth projects.

Cons: The asset used as collateral is at risk and the application process often takes weeks or months. Sometimes there are agreements on how the money is being used.

Unsecured business loans

An unsecured business loan means no collateral is being used. They often have a faster application process with no assets at stake. A personal guarantee from the company director, however, is often required, meaning they’re personally responsible if the business defaults.

Best use: One of the best business loans for a quick boost in working capital. See our list of the best unsecured loan providers here.

Loan duration: Up to 5 years.

Eligibility criteria: Lenders will assess the business’s financial health, as well as the business and personal credit scores of its directors. It’s common to have a minimum annual turnover requirement and a minimum trading history of 3 months, but the criteria vary more widely between lenders than with other loan types.

Pros: Fast access to funds and the money can be used more freely.

Cons: Interest rates are often higher for unsecured business loans and loan terms are shorter than secured loans. Personal guarantees are often common, meaning personal assets could be at risk.

Invoice financing

Invoice financing is a form of cash flow finance that allows businesses to use their unpaid invoices as collateral. Instead of waiting weeks for invoices to be paid, which is common in many sectors (e.g. the majority of construction firms wait a month beyond agreed terms), the lender advances a percentage of the total invoice value immediately (e.g. 80%). The most popular types are selective invoice financing and invoice discounting. 

Invoice financing is different from invoice factoring, where invoices are sold at a discount and carry the risk of scaring customers by being pursued by third parties.

Best use: Ideal for businesses with long receivables periods. Helpful in working capital, supplies and payroll.

Loan duration: Variable, with repayments dependent on when invoices are paid.

Eligibility criteria: Based predominantly on the value of accounts receivable, and to a lesser extent, the creditworthiness of said customers. B2B firms only.

Pros: 24-hour funding is common, and it’s scalable, meaning you’re funding level is not capped by your trading history or credit score.

Cons: Reduced profit margins and is only available for B2B firms.

Asset finance

Asset finance is often used to buy new equipment, vehicles or machinery. It’s a secured loan in which the collateral in question is the asset you’re purchasing with the loan. So, instead of using an unrelated, already existing business asset as security, it’s the new van or JCB that’s being purchased with the loan that’s used as collateral.

Best use: The best business loan for purchasing high-value assets without wanting to pay the full upfront costs, e.g. new IT hardware or specialist machinery. Business vehicle financing, such as hire purchase, leasing, or contract hire, is also a popular type of asset finance.

Loan duration: Typically 1 to 7 years.

Eligibility criteria: Lenders may assess creditworthiness and recent profitability. However, much of the focus is on the value and type of asset being purchased, and its expected depreciation.

Pros: Access high-value assets without putting up the capital, and without using personal assets as collateral. Costs are spread, making it a useful growth tool for revenue-generating assets.

Cons: More expensive than purchasing with cash, and repayments continue as the asset depreciates. In some instances, the business never owns the asset, and may have restrictions on its use (e.g., annual mileage caps on cars).

Startup business loan

A start-up loan, which is sometimes government-backed, is a solution for businesses with minimal trading history. Because the company may not be operational yet, it’s sometimes a personal loan aimed at helping entrepreneurs get new businesses off the ground.

Best use: Entrepreneurs struggling with the initial set-up costs, such as securing a business premise for an innovative 3D printing shop.

Loan duration: Typically 1 to 5 years.

Eligibility criteria: Varies depending on provider. Must be a relatively new, UK-based business, but some still require a minimum trading history of three months, while others have a maximum trading history cap of 2 to 3 years.

Pros: A welcome option for entrepreneurs without a trading history. Government-backed startup loans often have fixed and reasonable APRs, sometimes with a mentor as well.

Cons: You are sometimes personally liable for the loan and the amount you can borrow is often low. The application will be competitive and time-consuming due to the risks the lenders take on.

Business Bridging loans

A bridging loan is a short-term, temporary finance solution that is offered with the expectation that it will be repaid through the sale of the asset or by refinancing onto a longer-term loan. One use is to purchase a new property before the current one is sold, but there can be more flexible uses, such as using it to cover a large tax bill while waiting for other funding to become available.

Best use: Seizing opportunities quickly, securing a new premise or transitional periods (e.g. during a takeover).

Loan duration: 1-18 months

Eligibility criteria: There must be a clear exit strategy (evidence of expected incoming funds to pay off the loan). Typically, the business needs a valuable asset for security.

Pros: High-speed funding, enabling businesses to seize new property opportunities quickly. Interest can often be rolled up, too, to help cash flow. Usually, there are no early repayment fees.

Cons: High interest rates and arrangement fees can make repayment costly if selling a property or refinancing to cheaper long-term financing is delayed. There is a significant asset security risk and usually little scope for a plan B regarding the repayment plan.

Merchant Cash Advance

Often referred to as MCA, a Merchant Cash Advance is a form of revenue-based financing used to trade future card sales revenue for instant funds. The lender and borrower agree on the proportion of future card sales that will be automatically allocated to the lender until the advance is paid off.

Best use: Suited to retail shops and hospitality where there’s a high volume of card payments.

Loan duration: Flexible, as it’s based on sales volume.

Eligibility criteria: A consistent history of card payment revenue is required. Less focus is on creditworthiness, but evidence of the previous 4 to 12 months will often be required (either via uploading card statements or by giving the MCA provider access to card transaction data).

Pros: Repayments align with cash flow, meaning you pay according to ability. It’s also a fast and straightforward type of funding with no pressure to repay during lull periods.

Cons: When converted into APR, MCAs can be very expensive. It may also hinder liquidity down the line, and it’s only useful within a narrow field of industries.

Commercial mortgage

A commercial mortgage is a long-term loan for the purchase or refinancing of a property. The property or land must be for business use only, and like a residential mortgage, the loan is secured against the property in question.

Best use: Moving to a new premise or purchasing land for development.

Loan duration: 5 to 25 years.

Eligibility criteria: A reasonable credit score is expected, along with the overall financial structure of the company and its debts. Importantly, a minimum deposit is required, often between 20% and 40%.

Pros: It can be cheaper than renting and cheaper than using a general business loan. Interest is tax-deductible, and the asset in question is typically an appreciating asset in the UK leading to a healthier balance sheet.

Cons: A large deposit is required and there is still a risk of the property’s value falling, leading to negative equity. Failing to repay, the property can be repossessed.

Peer-to-peer loans

P2P loans connect businesses to other businesses or individuals who are looking to lend. P2P platforms eliminate the need to use a financial institution, like a bank, which can have rigid, outdated processes. The P2P platform typically uses the borrower’s creditworthiness to set the interest rate.

Best use: For those seeking a fast, streamlined online application or for individuals with a niche, untested business plan that a bank might not trust.

Loan duration: 6 months to 5 years.

Eligibility criteria: The minimum trading history can be higher, typically around 1 to 2 years.

Pros: Excluding financial intermediaries from the deal can enable more competitive rates. It’s a fast and efficient process.

Cons: Demand must be met with the exact amount of supply, which means you might have to wait for an investor. Fees still exist and can be high depending on the platform.

Credit lines

Often referred to as revolving credit, a credit line is a flexible type of financing that functions similarly to an overdraft (but isn’t tied to one bank). The lender is attributed a credit limit based on their creditworthiness and trading history, and the business can then draw funds as and when needed.

Best use: Suited to businesses expecting seasonal fluctuations or generally having volatile cash flow. It can also be helpful for business owners needing small, frequent funding.

Loan duration: Open-ended.

Eligibility criteria: Credit history is often important, as well as proof of predictable revenue.

Pros: Very flexible, where you only borrow what you need. This makes it cost-effective in terms of allocation, where the exact right amount is being borrowed at all times. Being readily available is also a psychological relief for entrepreneurs.

Cons: Interest rates are typically high and there may be fees (annual or for non-utilisation). Self-discipline also becomes more important.

Short-term vs long-term loans

Financing for up to two years is often considered short-term business financing. Short-term loans typically have a faster application and funding process, but are likely more costly. These are useful for addressing cash flow issues and managing working capital. Long-term loans typically have a longer application process, larger loan amounts, and lower interest rates.

Alternatives to small business loans

Business overdraft

A business overdraft differs from a credit line because it’s an agreement within a single bank account. The bank will agree on an overdraft limit, making it a safety net for addressing cash flow issues. Overdrafts often have a high approval rate due to having modest limits compared to many business loans. Interest is calculated daily on the overdrawn balance.

Best use: Covering small revenue drops and ensuring timely payments to other liabilities and suppliers.

Pros: Immediate access to funds, and is conveniently integrated into your bank account.

Cons: Interest is high, and daily, making it expensive when overused. The bank can sometimes unexpectedly ask for repayment or a reduction in the limit, making it less reliable than a credit line.

Crowdfunding

Crowdfunding is a distinct way to raise capital, typically used in the early stages of a startup, such as during the MVP phase. It’s a way to collect small amounts from many people (either future customers or investors). In return, it’s common to promise rewards, early access to products, equity in the company, or sometimes simply a donation.

Best use: Funding a creative project with a niche, interested community or with social values that generate support.

Pros: Create a community of loyal supporters before launch, with the potential for going viral and raising large amounts. Typically, it poses less of a threat to your assets and credit report if it doesn’t pan out.

Cons: A very public process that can come with scrutiny and staking one’s reputation on the line. It can require lots of marketing and community effort, equity dilution, or overestimating your ability to meet unique rewards or deadlines.

Business Credit Cards

A business credit card is another way to access revolving credit. Credit cards are useful for everyday spending, where the card itself is used for purchases, resulting in limits on how the credit can be accessed. It’s a common way to separate business finances from personal accounts, and balances can either be paid in full each month or partially, over time.

Best use: Paying for daily expenses and tracking employee spending.

Pros: Convenient for card purchases with strong protection. Helps build a credit score and typically comes with rewards, like air miles.

Cons: High interest rates, often with low credit limits and limited use of funds.

Small Business Grants

The best business loans are free business loans, and a business grant requires no repayment. Grants are often awarded by governments, trusts or other organisations with social and economic goals. Their aim is to improve innovation, job creation, or community development, meaning that some (or all) of these aspects need to be detailed during the competitive application process.

Best use: Startup ideas with positive social impact, high R&D costs before launch, or aligning with the grant provider’s goals.

Pros: The funding is free and can enhance the business’s reputation and brand through prestige and affiliation.

Cons: Highly competitive with a time-consuming application process.

How to choose the right type of loan for your business

• Eligibility criteria: Don’t waste time assessing loan types you’re not eligible for. Most require being UK-based, while minimum trading requirements vary between loan types. New businesses may look at startup loans, grants, crowdfunding, business credit cards, or even personal loans. Minimum revenue requirements also become a sticking point for MCAs, invoice financing and alternative online lenders.
• Speed of approval and funding: If you need the cash now, then consider alternative options, such as merchant cash advances or business credit cards. Online lenders offering unsecured loans, P2P loans, and revenue-based financing can be the fastest because they use automated assessment methods. However, if you have the time, more low-APR options open up.
• Interest rates (APR): The annual percentage rate plays a big role in the cost of your loan. While it can seem less important for very short-term financing (e.g., a credit line), frequent use can still add up. You must also weigh up the benefit of a lower APR with the increased risk of securing assets.
• Term length: This is the period over which the loan must be repaid. The longer the term, the more important APR becomes. Term length is just as important when determining the total cost of the loan. A longer-term loan has predictability in cash flow forecasts, though this isn’t suited for use cases where utilisation will be low, such as tying over end-of-month supplier payments.
• Fees: Fees also add to the total cost of a loan. Arrangement fees (one-off), early repayment charges (clearing the loan before the agreed-upon date), and late fees (for missing payments) are the key considerations. The longer the term, the more early repayment charges can become a problem. If you’re taking on frequent, short-term debts, arrangement fees can quickly add up.
• Repayment terms: It’s important to understand how the loan is repaid. Some loans have fixed monthly instalments, while others are flexible about when you repay. The former is suited to big projects with substantial upfront capital, while the latter is great for operating capital. Other repayment terms exist, like being tied to incoming revenue (invoices paid or card sales), and these are suitable for business owners who are either not confident about future sales (e.g., seasonality), or are simply swaying the lender with what they appear best at (generating sales rather than credit history).
• Credit checks: Many lenders, like banks, will perform a hard credit check. This appears on your credit history (unlike soft checks, which don’t) so you shouldn’t make too many requests at once. Being rejected may also mark down your credit score. If you’re more protective of your credit file, or simply have a poor credit score that you don’t want to be checked, then alternative online lenders and revenue-based financing are more suitable options.

What do you need to apply for a business loan?

All lenders will request your business’s details and conduct a KYC check. This means providing your Company House registration number or Unique Taxpayer Reference, along with trading name and address. Director and owner information, along with proof of address, will likely be needed.

Most commercial lenders will request business bank statements to review cash flow and revenue, even if they primarily rely on your credit score. Most lenders will also ask for permission to perform a credit check.

Some business lenders may ask for a detailed business plan. This is typically only required if the business has been trading for less than 12 months or the lender is a traditional bank. Full financial accounts may also be required. Merchant account statements and a list of debtors will be asked for MCAs and invoice financing, respectively.

Secured loan providers will ask for details of the asset to be used as collateral, such as property deeds or vehicle registration documents. An independent valuation report may also be required, as well as proof of deposit.

Pros and Cons of Business Loans

• Pros:
  • Fund growth opportunities through leverage and positive ROI
  • Smooth gaps in cash flow to help pay employees and suppliers on time
  • Retain ownership, unlike equity financing
  • Build up a better credit score, leading to better future terms
  • Use it to purchase appreciating assets, like property
  • Interest paid on business loans is tax-deductible
• Cons:
  • Financing for cash flow can wipe out profit margins and spiral out of control
  • Having a higher gearing ratio and debts impact the balance sheet
  • Often risking personal or business assets
  • Risk of damaging both personal and business credit scores
  • Time-consuming application, distracting you from revenue-generating activity

How to apply for a business loan

The first step is to assess your needs. How much do you need, when do you need it by, what is it for, what’s your future income looking like? The best business loans are those that align with your specific needs. The goal here is to first prioritise solvency and never take on more risk than you can handle.

Secondly, it’s to ensure you get the lowest total cost of funding possible, which is largely determined by the loan type.

After eliminating the loan types that don’t suffice (term length, loan size, timeline, etc.), eliminate the lenders and loan types you’re business is not eligible for. This might be because of a minimum trading history, for example.

Now you have a shortlist of business lending options to compare. The total cost of the loan is the important figure here, not APR alone.

After choosing a lender and product, gather the necessary documents. These will be detailed on the application page. The application process can typically be completed online or via a business finance broker.

How much can I borrow with a business loan?

The amount you can borrow will depend on the loan type, your business financial profile, and potentially your own credit history. Securing an asset is often the best way to borrow large amounts, such as £500,000 or more.

How can I improve my chances of being accepted for a business loan?

In the long term, improving your credit score and affordability (e.g., profitability and liquidity) will enhance your chances, as well as meeting the minimum trading history requirements.

In the short term, careful and accurate preparation of documents can be beneficial, along with dedicating effort to a detailed business plan and ensuring that other high-interest liabilities are paid off or reduced.

Can a start-up business get a business loan?

Yes, a start-up can get a business loan. Options are more limited, as many loan types and lenders have minimum trading histories. However, government-backed grants and loans are available, but they will require a strong application, as well as crowdfunding, which necessitates robust community-building efforts.

FAQs