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 it needs 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.
How do business loans work?
There are different types of business loan that work in different ways. What type you opt for can depend, among other things, on what stage your business is at.
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 “startup” 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:
Startup loans
Catering to companies that have been trading for less than two years, these loans are typically available for smaller sums and shorter terms (typically one to five years). With little or no accounts to go on, lenders may want to use a personal asset (generally a property) as security for the loan. Government-backed start-up loans are available, offering a fixed, low rate of interest and free mentoring for a set period, in addition to extra security for lenders.
Small business loans
Unlike a start-up loan, small business loan eligibility doesn’t necessarily depend on how long a company has been trading. The company does have to be “small” however, and exactly how small varies from lender to lender. Many require a minimum annual turnover. Small business loans can be secured or unsecured, and more often than not charge interest at a fixed rate over terms up to around 60 months (5 years).
Short-term business loans
If your industry is prone to seasonal variations, this is one scenario that could lead you to consider a short-term business loan. As you might imagine, these loans come with higher rates than, say, a five-year loan, as lenders will need to make the process worth their while. Alternatives to short-term business loans include a revolving line of credit such as a 0% purchase business credit card, or a decent overdraft facility on a business account, although these options typically come with lower credit limits. Invoice factoring/discounting can also offer support to businesses with a fluctuating turnover, if they depend heavily on client invoices.
Medium- to long-term business loans
Normally covering terms above five years, and potentially for larger sums, these loans can be used to fund larger projects for company growth. Expect close scrutiny of your business plan, loan security requirements and a longer, more thorough application process.
P2P business loans
Peer-to-peer (P2P) loans aim to connect investors with SMEs looking for finance. By cutting out the overheads normally associated with high-street banks, these companies are often able to offer more competitive rates.
Spotcap flexible business loans
A line of credit up to £250k that converts into a loan when you draw down.
1-24 month term
Online application
Decision in 1 working day
Dedicated client service
No early repayment fees
Representative example: Borrow £100,000 over 12 months with an average monthly interest rate of 1.4% and a 2.0% arrangement fee. Representative APR 22.8% and total payable £109,332 in monthly repayments of £9111.
How can I find the best business loan for my company?
Here are some of the key features to consider when comparing business loans:
Amounts available. Having set out your business plan, you should know how much you need to borrow, and one of the first things to look at when evaluating a loan is whether or not it can offer you the sum that you need.
Terms available. You may have a fairly clear idea of the length of time want or need to borrow for, or this factor may be dictated by the size of the monthly instalments.
Eligibility. Never apply for a loan without checking that the business is eligible for it. It’s a waste of time and demoralising – and the rejection could be visible to future prospective lenders.
Security required. It’s not unusual for lenders to ask for a personal guarantee – meaning an individual will be personally responsible for the loan. Security can also take the form of a company’s realisable assets, such as a property, vehicles or equipment. Where no assets are available, it may be necessary to secure the loan on a director’s own property.
Total costs. It can be easy to obsess over APRs (rates), but perhaps more importantly, how much is this loan going to cost overall?
Interest rates. Is the rate offered variable or fixed? Is it competitive?
Fees. Look out for “product” or “set-up” fees as well as any annual/monthly account charges. Lenders sometimes offset an attention-grabbing low rate with product fees, so it’s crucial to also keep an eye on the total amount payable.
Repayment holidays. Repayment holidays are set periods when you don’t have to make any repayments. This might be, say, the first three months of a loan. This can give your company an opportunity to get back on its feet financially, but will usually extend the term of the loan by the same number of months, pushing up the overall cost of the loan.
Early repayment terms. It’s hard to predict what’s around the corner, let alone three or four years down the line. If the option to repay early is important to you, you’ll need to check the early repayment (or overpayment) terms of the specific product or products you’re considering. It’s important to note that “No early repayment fees!” does not necessarily mean that repaying early will save you money on interest.
Compare business loans
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.
Have you considered…? Learn about alternatives to business loans
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.
Get funding from investors. Small or young businesses could stand to benefit the most from selling a share of their enterprise in exchange for financing.
Start a crowdfunding campaign. Set a fundraising goal, invest a little in marketing and collect small donations from family, friends, your community, fans or just random interested individuals!
Apply to a government scheme. Various government schemes exist to encourage small businesses (often called “the backbone of the UK economy”). Learn more about government support for businesses.
Take out a business credit card. With a business credit card you can borrow what you want (subject to a credit limit), when you want, so you’ll only pay interest for the days on which you borrow. Subject to a monthly minimum repayment, you can also pay back funds on terms that suit you. Unlike a fixed-term loan, that closes when all the money has been repaid, a credit card is a “revolving line of credit”, which means that the facility is effectively always open (which can be a mixed blessing).
Capital on Tap Business Mastercard
Get up to £50,000 in minutes to grow your business.
Enjoy up to 56 days interest-free on purchases if you pay off your balance in full each month.
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Representative example: When you spend £1,200 at a purchase rate of 39.941% (variable) p.a., your representative rate is 39.9% APR (variable).
This really depends on the loan you opt for, and the efficiency of the lender’s systems and processes. Some lenders claim to be able to issue a small business loan in a matter of hours, but more commonly the minimum turnaround time is likely to be a couple of working days. If quick access to funds is crucial for your situation, factor this into your comparison.
Yes, as far as the lender is concerned, they have given you the full amount for an agreed period. In contrast, a revolving line of credit, like a business credit card or an overdraft on your business account, will only charge interest on the outstanding balance.
*Disclaimer: The offers compared on this page are chosen from a range of products whose details Finder has access to track; they don't represent all the products available in the market. Unless indicated otherwise, products are displayed in no particular order or ranking. The terms "best", "top", "cheap" (and variations) are not product ratings and are subject to our terms of use. You should consider seeking independent financial advice and consider your personal financial circumstances when comparing products.
Chris Lilly is a publisher at finder.com. He's a specialist in credit-based products including business and personal loans, mortgages and credit cards, and is passionate about helping UK consumers make informed decisions about their borrowing. In his spare time Chris likes forcing his kids to exercise more.
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