SME Loans

Compare the types of SME loans available in the UK and see if they are right for your business.

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Ready to expand your business and invest in new assets? SME loans are one of the fastest ways to scale your venture and achieve your goals.

In this guide, we’ll cover the different types of SME loans and how to be approved for one.

What Is An SME Loan?

A SME business loan is designed to fund small and medium-sized businesses. And as there are 5.9 million SMEs in the UK alone, these loans come in a variety of shapes and sizes. Which of the many SME loans you apply for will depend on your specific business needs. 

Where once SME business loans were typically used to invest in operations and extending reach, a growing number of businesses are now using the extra capital to balance cash flow.

So how much money can you borrow?

Some SME loans will cover four-figure sums, whereas others may reach up to £1 million. It’s worth noting, though, that the closer your loan request is to the seven-figure mark, the harder it will be to be approved.

That being said, if you’re a startup or a smaller business with a proven track record, you should be able to qualify for a six-figure loan without too much trouble. 

Types Of SME Loans

Secured Loans

The secured business loan is one of the most popular types of SME business loan. A secured loan is a loan that’s backed by collateral, like business equipment, which your lender can seize if you default on the loan. This reduces the risk to your lender, which helps you secure better rates and higher loan amounts.

Unsecured Loans

An unsecured business loan is a loan that doesn’t have collateral; if you default on the loan, your lenders can’t seize anything belonging to you, or your business. This is less risky for you, but it creates more risk for lenders. For this reason, unsecured loans tend to have higher rates, lower amounts, and stricter requirements.

Business Line Of Credit

A line of credit is a cross between a loan and a credit card. You can spend up to a specified amount (typically around £50,000 for SMEs, but can be much higher), so long as you pay off that amount and its interest within an agreed-upon deadline – like a loan. 

You can then keep using, and repaying, the money you borrow on a line of credit so long as you continue to pay on time – like a credit card.

What To Consider When Comparing SME Loans

Loan Type

Although all of the loans we’re talking about in this article fall under the same “SME loans” umbrella, they’re very different from one another. Unsecured loans are great for newer businesses, secured loans are better for more established businesses, and a business line of credit is a solid option for businesses that need flexible funds.

Loan Amount

The loan amount is the amount you’re going to borrow, not how much you’re going to pay back. So you’ll want to settle on an amount that you can reasonably pay back after interest is applied. The savviest approach would be to invest your loan in areas of your business that will provide a high ROI – that way the loan pays for itself. However, as we mentioned before, fewer and fewer SMEs have the bandwidth to do this right now.

APR

APR, or annual percentage rate, is a combination of the interest you’re going to pay along with any annual fees, processing fees, paperwork fees, etc. It’s the most accurate representation of how much it’s going to cost you to borrow a loan, so make sure you know it before you sign on the dotted line.

Terms

Finally, you need to consider how long you want to carry your loan debt. The faster you repay a loan, the less you’re going to spend in interest. However, this will also increase the amount of each installment, which can choke your funds. Determine what you can afford each month before agreeing to a loan, and then choose your loan term based on that amount.

Is Your Business Eligible For An SME Loan?

Just like a personal loan, several factors are considered before your business is approved for a loan. This includes:

  • Credit Score. For small businesses, this will usually be the owner’s credit score, not the business’s credit score. The higher your score, the better.
  • Age Of Business. Businesses under two years of age will usually have a harder time obtaining an SME loan.
  • Cash Flow. You can usually offset the age of your business with high income and low expenses.
  • Debt. The less debt you have, the more likely your business is to be approved for an SME loan.
  • Collateral. As mentioned before, collateral can help you secure better rates and higher loan amounts, though it does pose more risk to your company if you default.
  • Industry Risk. The more volatile your industry, the harder it will be to be approved for an SME loan.

FAQs

SME is an acronym for small to medium-sized enterprises and usually refers to younger businesses (though not always).

SME banking refers to corporate or business banking, as opposed to personal banking. More specifically, it refers to banking for small to medium-sized businesses.

You can apply for SME loans through banks and other financial institutions. Your qualifications (credit score, industry, etc.) will determine whether or not your application is approved.
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