Compare the best business loans and financing of 2023
If you're self-employed, a sole trader or a freelancer, launch or grow your small business by comparing finance options from UK lenders.
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More often than not, you need money in order to make money. A business loan can give a company the capital it needs to get off the ground or to get to the next stage of its evolution. That might require just a few thousand pounds or hundreds of thousands, for a couple of months or a couple of decades. There’s a range of lenders out there to cater to the full spectrum of what you need.
Companies usually apply for a business loan when they need to borrow cash or capital from a bank. The amount is repaid with interest and fees may apply. Government-backed start-up loans are also available.
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How do business loans work?
There are different types of business loans that work in different ways. What type you opt for can depend on what stage your business is at, amongst other things.
Much like an individual, a company has a credit record and credit score. The healthier these are, the easier it will be to secure finance. A new business is obviously not going to have much in the way of credit history, so a lender will either want to start small, or will need some form of security. Loans for launching a new business or for a business which has just launched are often referred to as “start-up” loans. These are typically available over terms of one to five years, and can be government-backed.
More mature businesses have a variety of loan options, thanks to a credit history, a few years of accounts and an established turnover. These are in addition to other types of credit available such as business credit cards or factoring. Let’s take a look at some of the main loan options available in a little more detail.
What types of business loans are available?
Here are some of the main sorts of loans that are available to SMEs in the UK:
There will be heightened competition and innovation as lenders – in particular non-banks whose traditional markets have been disrupted by the pandemic – look to carve out new customer niches in order to remain viable. Competition will be the most fierce for the highest quality businesses, so those customers can expect to have a wider choice of products.”
What are my other business finance options?
So what happens if your business is too young or small to qualify for a loan with decent terms? Or maybe it’s just a bad time to take on debt? You still have financing options.
Does your business depend on invoices?
- Invoice discounting. You might want to consider invoice discounting if your business sometimes has gaps in revenue due to outstanding accounts. Invoice financing lets you borrow against your outstanding invoices and repay the lender once the client pays you. It is an ongoing service with loans that you can pay back in an agreed period.
- Invoice factoring. Alternatively, look into invoice factoring. Here, you sell your invoices to a third party for a percentage of the invoiced amount. You don’t get the full value of your invoices – this is the more expensive of the two options explained here – but you won’t have to worry about credit control (chasing up repayments). Don’t forget that with this option, the factoring company will have contact with your clients, so you’ll need to be OK with that.
How can I find the best business loan for my company?
Here are some of the key features to consider when comparing business loans:
Business loans glossary
- APR. The Annual Percentage Rate (APR) represents an annual summary of the cost of a loan. As well as the interest, the APR also takes into account any compulsory charges – like an “admin” or “set-up” fee (if there is one). However, crucially, lenders only have to award the advertised APR to 51% of those who take out the loan – the other 49% could be offered a different (higher) rate, at the lender’s discretion. That’s why it’s often referred to as the representative APR.
- Asset financing. A form of business finance where you borrow money to buy a piece of equipment and secure the loan against it.
- Broker. Brokers don’t lend money, but assess your business’s circumstances to help you find a suitable lender. They can help you find a good deal, but you need to be aware that they won’t check the whole market for you – usually they will only introduce you to providers they have a partnership with.
- Cashflow. Also referred to as “working capital” or “operating liquidity”, this is the portion of revenue a business can afford to spend once all the current expenses have been taken into account.
- Credit check. This is when the lender checks your business credit record to assess whether it can offer you a loan or not, and at which rate. There are two types of checks: “soft” checks are generally carried out when preliminarily assessing a borrower’s eligibility and won’t show on your credit report, whereas “hard” checks will, and are usually carried out when the actual application takes place.
- Credit reference agency (CRA). Credit reference agencies are the companies that hold your credit history. Lenders report borrowing activity to these agencies, and request information from them (a credit search) when considering applications for credit. The three main CRAs in the UK are Experian, Equifax and TransUnion (formerly CallCredit).
- Debenture. A debenture (or “floating charge debenture”) is a form of loan security. It gives the lender a charge over all a business’s assets, which it can use to recoup any losses in the event that you fail to repay a loan.
- Default. Defaulting on a loan means failing to make a pre-agreed repayment at the specified time. This will typically result in the borrower being charged a penalty plus damage to the borrower’s credit record.
- Direct lender. The term “direct lender” is used by lenders to distinguish themselves from brokers. A direct lender issues loans, while a broker refers you to a direct lender to get your loan.
- Eligibility criteria. A list of conditions that a borrower must meet in order to be considered for a loan. These vary from lender to lender, but for a business loan may concern the type of business, its revenue, how long it’s been trading and a bunch of other factors.
- Fixed rate. A fixed rate will not change for an agreed amount of time, even if market conditions mean that bank interest rates generally are increasing or decreasing. A fixed rate can be a popular option for some borrowers and it allows them to budget with more certainty – knowing in advance the exact cost of a loan and the exact figure for each instalment.
- Instalment. A repayment towards an outstanding loan. This will normally consist partly of interest accrued so far and partly of a proportion of the original sum borrowed.
- Interest rate. The interest rate is a charge for borrowing, and is a percentage of the amount of credit.
- Invoice finance. A business loan that’s secured against your business’s unpaid invoices. Invoice discounting, factoring and trading are all types of invoice finance.
- Loan term. The amount of time over which a loan is to be repaid.
- Merchant cash advance. An unsecured business loan that you pay back as a percentage of your business’s card sales.
- Personal guarantee. It’s technically a promise to accept legal responsibility for someone else’s debt. If you sign a personal guarantee to get a loan for your business, you’ll be personally responsible for its debt.
- Principal. Also referred to as the “capital” or “loan amount”, this is the original amount borrowed.
- Selective invoice discounting. This is when you select specific invoices that you’d like to borrow against, rather than using your whole sales ledger.
- Unsecured.Unlike a secured one, an unsecured loan does not use an asset, such as a property or vehicle, as collateral for the loan.
- Variable rate. A variable rate is the opposite of a fixed rate, and can increase or decrease over time at the lender’s discretion. Typically, variations occur as market conditions generally shift – for example an increase or decrease in the Bank of England base rate.
Frequently asked questions
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