Compare Business Loans

Beginner’s guide to business loans in the UK

What is a business loan?

A business loan is a form of finance that can be used to help support and expand your organisation.

As with personal loans, you borrow a sum of money, and pay it back, with interest.

One of the most important differences between personal loans and business loans is that with a personal loan, you will be personally liable for repaying the amount you have borrowed.

With a business loan, as long as the appropriate company structure is in place, that responsibility falls to the business instead. This will not be the case, however, if you are a sole trader, or you have secured your business loan with a personal guarantee.

You can also typically borrow more through a business loan, while the interest payments on your business loan may be tax deductible unlike payments on a personal loan.

How to get a business loan

1. Decide how much you want to borrow and for how long. Once you’ve decided a business loan is the right option for you, it is important to consider the balance between what you can afford and what you need to help your business.
2. Compare business loan lenders to find the right fit for your organisation. Shopping around might help you get a business loan that best suits your needs. You can use our comparison table to search through the business loans available and find the right one for your company.
3. Submit your application and all relevant documents. This may include how long you have been trading, details about your finances, and what you want the money for.
4. Wait to hear back. It can take a couple of hours to a matter of weeks to hear back about your business loan application, depending on your financial circumstances and the lender in question.

Who is eligible for a business loan?

Sole traders, small and medium-sized enterprises (SMEs) and large businesses may be eligible to apply for a business loan in the UK. However, lenders will set their own criteria and determine your eligibility for a loan based on information such as

• the age of your business
• where your business is based
• your annual turnover
• your business and personal credit history

» MORE: Can I get a business loan?

What credit score is needed for a business loan?

There is no fixed personal or business credit score you need to apply for a business loan. However, a strong credit score could increase your chances of success, and potentially give you access to lower interest rates, although it isn’t the only factor lenders will consider.

For example, credit reference agency Experian’s business credit score ranges between 0 and 100. The closer your score is to 100, the less of a risk you are likely to be seen as by lenders, and therefore the better your chances are of getting a business loan.

However, bear in mind that your credit score isn’t the only factor that lenders will consider when deciding whether to offer you a business loan.

Can I get a business loan with poor credit?

A poor credit rating may make it more difficult to get a business loan, but it’s not impossible. Lenders that offer business loans for bad credit usually charge higher fees and interest. Taking steps to improve your business credit score can help boost your chances of being accepted for a loan at more favourable rates.

Will a business loan affect my personal credit score?

Some lenders may carry out credit checks on your business and personal credit files.

If a ‘hard’ credit check is carried out on your personal file, this check will appear in your own credit history, and may temporarily reduce your credit score.

Once you have secured a loan, missing payments may negatively affect your own credit score if you are personally liable for the loan, for example if you operate as a sole trader.

» MORE: Could a business loan affect my personal finances?

What if I’ve been refused a business loan in the past?

If you have been refused a business loan in the past, it is a good idea to review the reasons why you were rejected and take steps to rectify those issues before applying again.

This could involve paying any outstanding debts, taking steps to improve your personal and business credit scores, and reviewing your financial accounts to make sure they are in the best shape possible.

How long does it take to get a business loan?

The amount of time it takes to get a business loan varies between lenders. Some claim to offer pre-approved loans in less than two minutes. Others may take weeks or months to approve your loan and payment.

How much can I borrow with a business loan?

The amount of money you can borrow for a business loan and the repayment term will depend on the finances of both yourself and the business, as well as the lender you apply to. An online business loans calculator can help you work out roughly how much you can borrow and how long for.

Typically, companies can borrow between £1,000 and £500,000 with a small business loan.

When do I need to pay back a business loan?

Typically, you will need to start repaying your business loan from the set repayment date agreed between you and the lender. This will usually be within the first month of receiving the loan amount. You will then repay the loan on a monthly basis until the debt has been cleared.

Some lenders may offer a repayment holiday, delaying the start date of your repayment plan. Similarly, if you are struggling to repay your loan, you may be able to apply for a repayment holiday. Interest will usually continue to accrue during the payment holiday period.

Are business loans hard to get?

How difficult you find it to secure a business loan will depend on your financial circumstances and the lender in question. Taking steps to improve your credit score, writing a detailed business plan, and making sure your accounts are in all can all help your chances of success.

Pros and cons of business loans

It is important to consider the benefits and disadvantages of taking out a business loan before you apply.

Pros

Below are some of the advantages of taking out a business loan:

• It can help companies access funds for daily operations and business growth.
• Some lenders offer flexible repayment lengths.
• You keep full equity in your business.

Cons

But there are some disadvantages to consider with business loans:

• Missed or late repayments can negatively affect your business credit rating.
• Business loan repayments may affect your cash flow and long-term business growth.
• You may lose an asset if you can’t repay a secured business loan.
• You may have to pay legal and valuation costs when applying for a secured loan.

Do I need a business bank account to get a business loan?

While it is not always a requirement, you may find that many lenders will not consider you for a business loan if you do not also have a business bank account. It can also make the application process simpler if you do.

In general, business bank accounts can make it easier to manage your finances, and ensure that there is a clear separation between your personal and business funds. This is especially important when it comes to managing a business loan.

» COMPARE: Business bank accounts

Are business loans regulated?

Most forms of business lending are unregulated. However, if the business lending is worth £25,000 or less, and is for certain business types, such as sole traders, it may be regulated by the Financial Conduct Authority (FCA).

You should research the form of business finance you are interested in, and the lenders involved, to check if they are regulated ahead of applying.

Types of business loans

There are a few types of business loans:

Secured business loans

Secured business loans require that you put down an asset such as property as security. Secured loans often come with lower interest rates than unsecured loans as they represent less risk for the lender. They may also give you access to a larger loan amount over a longer term. However, secured loans come with the added risk that you could lose your assets if you miss the payments.

» COMPARE: Secured business loan deals

Unsecured business loans

Unsecured business loans are a type of finance that does not require security. These types of loans tend to have higher interest rates because there is a greater risk of the lender losing money if you can’t pay off what you owe. Unsecured business loans also require a good financial history and credit rating as evidence that the business will be able to repay the loan.

» COMPARE: Unsecured business loan deals

Government loans for businesses

There may be government-backed business loans you can access. Examples include the Recovery Loan Scheme, introduced to help with the financial stresses caused by the Covid-19 pandemic, which has now been extended.

What schemes are available can vary depending on government policy and changing economic circumstances across the country. So it can be useful to regularly check the Department for Business, Energy & Industrial Strategy’s search tool for guidance on the business loan schemes available in your region.

» MORE: Government business loans in the UK

Start up business loans

The Start Up Loan Scheme is a government-backed fund that currently offers personal loans of up to £25,000 to UK businesses owners that have been fully trading for less than 36 months or those looking to start a business.

You can apply for free, and there are no early repayment charges. If your application is successful, you’ll also get up to 12 months of free mentoring.

Government Start Up Loans have a fixed annual interest rate of 6% and must be repaid over a period of one to five years.

» COMPARE: Start up business loans

Small business loans

Small business loans are for start ups and small businesses to access funding. They can be used for a variety of purposes from hiring new staff to managing cash flow. As with all loans, small business loans are repaid over an agreed time period with interest.

Large business loans tend to be cheaper than small business loans because there is less perceived risk with lending to a bigger company.

How can I use my business loan?

A business loan is a source of finance for companies that need money for a variety of purposes. Below are some of the reasons you may consider getting a business loan:

• Cash flow: A business loan could help improve your business’s cash flow. However, you will need to have a strategic plan in place to overcome future cash flow issues.
• Business growth: The money you borrow could help your business expand.
• Purchasing power: Business loans can help you buy new equipment, increase inventory or invest in office space.
• Recruitment: Money borrowed through a business loan may be used to invest in recruitment and hire new employees.

» MORE: Why do businesses need finance?

What do business loan lenders look for?

When reviewing your application, business loan lenders may look at the following:

• your personal and business credit scores
• your business’s trading history
• your cash flow forecasts
• whether you have borrowed (and repaid) money in the past
• a business plan

This is essentially a lender carrying out a risk assessment of your company. They want to see evidence that you will be able to repay the loan, in full and on time. The less risky they perceive your business to be, the more likely you are to be successful when applying for a business loan.

How to choose the right business loan for you

There are a number of factors to bear in mind to help you choose the right business loan for your needs.

Is a business loan right for me?

Before you apply for a business loan, you should consider whether it is the best fit for you and your organisation. There are a few fundamental questions you can ask yourself to help you decide whether a business loan could be right for you.

1. How much do I want to borrow?
2. When do I need to repay the loan?
3. How much can I afford to repay each month?
4. Am I struggling with unpaid invoices?
5. Do I hold equity in a property?
6. Do I need the loan to buy a specific valuable asset?
7. What’s my personal and business credit rating like?
8. How long has my business been operating?
9. Do I need a lump sum all at once?
10. Do I have a back-up plan if I can’t make repayments?

How much will the business loan cost?

A big part of choosing a business loan is understanding the cost. This will vary depending on the following factors:

• how much you borrow
• your repayment term
• the interest rate
• fees (such as early repayment charges)

You can use an online business loans calculator to estimate how much your repayments will be.

Business loan interest rates

Like the overall cost of the loan, your interest rate may depend on the lender in question and the financial circumstances of the business or any individuals applying for the loan.

You may be able to choose between a fixed interest rate or a variable interest rate. A fixed interest rate will not change for the duration of your loan term. A variable interest rate, meanwhile, may rise and fall in line with the Bank of England Bank Rate and at your lender’s discretion.

Which one you go for depends on whether you want the comfort of knowing exactly how much you are repaying each month or the potential for your interest rate to fall over time whilst being willing to take the risk that it could also rise over time.

There will also then be differences between the interest rates offered for secured and unsecured business loans. Rates for loans can vary and you should check product details to find the current rates available on the market. The Start Up Scheme, backed by the government, is an unsecured personal loan; charges on this loan are currently a fixed interest rate of 6%.

How trusted is this lender?

You should make sure that the lender you choose is a trusted and legitimate source of business finance. Check out its reviews online and whether it is regulated by the FCA. You can do this by searching the FCA’s financial services register. This will give you an indication of whether or not you should give them your business.

How to apply for a business loan

Applying for a business loan may be easier than you think. Just follow the three steps below.

Step 1: Choose your lender

This is arguably the most important step. Carefully compare the lenders out there, taking into consideration:

• interest rates
• repayment terms
• early repayment fees
• online reviews
• maximum and minimum amounts borrowable
• eligibility criteria

Once you have chosen your lender, you can then move on to filling out your application.

Step 2: Supply the lender with the relevant documents

Alongside submitting an application form, most lenders will ask for the following documents when you apply for a business loan:

• proof of ID
• proof of address
• proof of an active bank account
• three months of consecutive bank statements
• visa details if you are not a UK citizen
• your business plan and financial details

Getting everything you might need together ahead of starting your application may help the entire process run more smoothly.

Step 3: Wait to hear back

Once you’ve submitted your application, along with the relevant documents, it is time to wait. The approval period for a business loan can vary, from hours to weeks.

If your business loan application is rejected, you may be able to borrow through the Bank Referral Scheme. The scheme ensures that participating UK banks refer unsuccessful business loan applications to a designated pool of online lenders to help them find finance.

It may also be worth contacting a Community Development Finance Institution (CDFI). These organisations specialise in lending to businesses that don’t fit traditional eligibility criteria for a business loan.

Tips for maximising your business loan

Once you have your business loan, you need to make sure you use it effectively. Below are some tips on how you can maximise your business loan:

• Create tangible targets. To ensure you use your funds correctly and have something to show for it the other side, it is wise to create specific goals you want to achieve with the money you receive through the loan. Ideally, you would come up with a plan before you apply for finance.
• Detail exactly what you will spend the money on. Once you have an idea of what you want to achieve, set out exactly what the loan will be spent on, over a concrete time frame. This will help lay a path to achieving your targets.
• Consider a separate bank account. Depending on what you intend the loan to be used for, you may want to consider opening a dedicated business bank account for the funds. This will make it easier for you to review your finances and see how much you have left at any given moment.
• Regularly review your finances. The funds being in your account is only the beginning of managing your loan. Regularly review how much you have left, what it has been spent on, and how that compares to the plan you came up with before you applied. It won’t always be possible to keep on target; unexpected expenses are part and parcel of running a business. However, tracking your spending will mean you hopefully won’t veer off course.

» MORE: How to grow your business

Alternatives to business loans

There are many funding alternatives to consider if you’re unsure about whether a business loan is the right option. Some of these include:

Business credit card

You could consider using a business credit card for short-term borrowing. You may need to open a business bank account with your chosen provider in order to access this form of finance.

» MORE: What are business credit cards?

Business grants

There are a number of schemes and grants available that provide money to businesses for a variety of purposes. The key difference between a business loan and a business grant is that you will not need to pay the latter back.

» MORE: Small business grants in the UK

Crowdfunding

If you want to communicate directly with customers, or potential investors, then you could set up a profile on a crowdfunding platform to raise funds from members of the public.

» MORE: Crowdfunding for businesses

Angel investors

Angel investors are normally wealthy individuals looking to provide finance to small or start up businesses, with the aim of securing a return on their investment.

» MORE: What is an angel investor?

Business overdraft

With an overdraft, you can borrow money through your business bank account for a short period of time, up to an agreed amount.

Merchant cash advance

A merchant cash advance loan allows businesses to borrow against future debit or credit card payments made by customers.

» COMPARE: Merchant cash advance

Invoice finance

Invoice financing allows companies to borrow against their pending customer invoices.

» COMPARE: Invoice financing companies

Asset finance

With asset financing, businesses can either get funding to purchase or lease vital equipment, or use their own assets to unlock funds.

» COMPARE: Asset financing

Business Loan FAQs