Looking for a loan for your small business? We cover the most important information you need to know here. Just click on the headings below for the answers to your most frequently asked questions.
Business loans quick facts:
Small business loans cover a wide variety of lending arrangements, with term lengths from days to years, and lending levels from hundreds of pounds to hundreds of thousands
You can borrow to meet a wide range of commercial needs, including purchases of property, vehicles, machinery and up-scaling your business
Short-term loans for businesses are available from specialist Internet companies and credit unions – they work in a similar way to payday loans for individuals
Peer-to-peer business loans effectively cut banks out of the lending equation, with market platforms facilitating loans from individuals to commercial organisations
The APR rate of comparison takes into account the interest you’ll pay as well as any fees
What are business loans?
Business loans can be used to help your business to grow or to meet necessary big expenses that you can't - or don't wish to - meet upfront. There are a wide variety of different types of business loan available - the most appropriate one for your business depends on your circumstances, needs and future plans.
The term 'business loan' is usually used for facilities designed for small businesses - larger organisations are usually serviced by corporate finance arrangements.
What types of small business loan are there?
Common types of small business loan include, but are not limited to:
- Secured loans – Loans where property – such as premises, machinery or other valuable assets – is used as collateral to guarantee the repayment of the loan. If the repayments are not made, the property may be repossessed.
- Unsecured loans – Loans where property is not used as collateral to guarantee the repayment. These tend to carry higher rates of interest than a secured loan to hedge against the added risk.
- Short-term loans – similar to pay-day loans for personal finance, these are emergency loans that are available with terms of days or months. They carry larger-than-typical interest rates, which often run into the hundreds or thousands of per cent. They sometimes offer the flexibility to pay back early and offer near instant approval decisions.
- Business peer-to-peer loans– Peer-to-peer loans are lending arrangements conducted directly between two non-financial entities. FFacilitated by third party, usually Internet-based, companies, the loans usually consist of several smaller amounts contributed by individuals, although they can be sourced from a single investor. You can appeal for contributions to your desired loan amount by advertising your business and setting your own offered interest rate. Alternatively you can apply for loans offered by third parties.
Who offers business loans?
Business loans are offered through a wide range of sources, including traditional high street banks and building societies, specialist lenders, crowd-sourcing platforms, peer-to-peer markets and investors.
High street banks and building societies usually provide for small businesses through their retail arms, although some separate their commercial and personal services.
How much can I borrow through a small business loan?
Business loans can range from hundreds of pounds to hundreds of thousands, depending on the type of loan, provider and the circumstances of your business.
How long can I borrow for with a small business loan?
Depending on the type of loan you opt for, you can borrow from anywhere between a matter of days and a number of decades. As with personal finance, business mortgages and secured loans can be available for 25 years and potentially longer, although many lenders cap term lengths for business facilities at around 10-15 years.
What can I use a business loan for?
Business loans can be used for a wide range of applications, including premises, machinery, vehicles, for scaling up, entering new markets, for R&D or pretty much any other legitimate use.
Banks will take into account your reasons for needing the loan within the approval process and may seek to prove that it represents a sustainable investment.
Can I get a loan to buy business premises?
Business mortgages are available to buy business premises, as well as large machinery or other more costly investments. The business mortgage acts as a secured loan, where the premises or property that is purchased through the loan is put up as a guarantee against missed repayments. The purchase can therefore be repossessed if the terms and conditions of the mortgage are broken.
What are the alternatives to business loans?
Alternative forms of finance to small business loans include business overdrafts, commercial credit cards, crowdfunding (where you seek small investments or donations from a large number of people who may be interested in your venture), invoice financing and factoring (where a third party pays you to inherit the debts you are owed), government and support grants, and angel investments/venture capital.
Who can apply for business loans?
To be eligible for a business loan, lenders usually stipulate that an organisation must be VAT registered, have at least two years worth of trading accounts, and have no county court judgements made against them within the last six years. They may also stipulate a minimum annual or monthly turnover level.
Some lenders may relax some of these stipulations, especially niche lenders that focus on smaller businesses.
I want to start a business - can I get a loan?
Although banks and financial providers often stipulate that businesses must be established, with demonstrable accounts, there are other sources of lending for those looking to begin a new venture. Schemes run by government, local authorities, and not-for-profit organisations offer funding under various terms to get startups off the ground. A good source of information on the government start-up loan scheme is the government-backed Start Up Loans Company.
How do I choose a business loan?
The biggest point of comparison for business loans is the APR (Annual Percentage Rate). This figure represents the yearly return that you will have to make as a percentage of the total value of your loan, taking into account both the interest you have to pay and any fees. It doesn't include the repayment of the actual debt. The term length you are seeking should form part of this comparison, taking into account the number of years you will be servicing the loan for, and therefore the amount of interest you'll pay back in total.
It is important to also consider the terms of your loan, including what happens if you default on your repayments, and the ways in which you will be able to interact with your lender.
What do I need to do before I apply for a business loan?
Before applying for a business loan you should cautiously take stock of all of your business outgoings and incomings, both current and projected, in order to calculate how much you will be able to comfortably pay back each month. It is important that you take into account the regularity of your incoming payments to ensure that you are not faced with periods where your repayment could be threatened by late paying customers or lean trading spells.
Some lenders offer capital repayment holidays to guard against this threat - an arrangement whereby you will only need to pay interest, and not pay down the balance of your debt, for a pre-agreed period of time.
Will I be accepted for a business loan?
Your business's financial history, turnover, accounts, market conditions, other credit facilities and myriad other factors will usually be taken into account by a provider assessing your application.
For short-term loans, fewer criteria may be considered.
If you are a sole trader or part of a partnership then your personal circumstances and financial history may also be considered, though not if you own a limited company.
How long does the approval process for small business loans take?
High street banks and building societies usually take a few days to approve a business loan, and a further few days to pay the money into your bank account if the application is successful.
Short-term lenders often make approval decisions and transfer funds on the same day as the application, sometimes in as little as 15 minutes.
How do I check my business credit rating?
You can check your business credit rating with the major credit ratings agencies on a one-off basis (in return for a small processing fee) or continually, ad hoc, by subscribing to a service product. You can usually access the files each company holds on you online, including their evaluation of your credit worthiness in the eyes of lenders, though this is a subjective reading.
I have a poor business credit rating - can I get a loan?
If you or your business have previously experienced financial difficulties, such as having had county court judgments made against you or falling into arrears with previous lending arrangements, you may struggle to be accepted for a loan through conventional channels such as high street banks and building societies.
However, specialist lenders may still be able to cater for your needs. You may find it easier to be approved for a short-term loan through a commercial credit union or Internet-based company, although you may face a higher interest rate.
You may also be able to entice individuals to lend you money through peer-to-peer markets by offering better-than-average interest return rates.