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How to get a business loan

Alicia Babaee, Consumer Finance Specialist
Written by Alicia Babaee, Consumer Finance Specialist

28 July 2020

If you want to take your business to the next level but don’t have the funds to do so, you could consider getting a business loan.

Businessman using broadband

What is a business loan?

A business loan is just a loan that you take out to support your business growth. You pay them back in instalments, with interest.

How do business loans work?

When you take out a business loan, you’ll have to apply for it and tell the lender what it’s for.

You can choose how long you take it out for. You’ll usually pay it back over a period of one to 30 years, depending on whether you go for a medium-term or long-term loan. You might decide how long you want your term to be based on how much you’re borrowing. The payments and interest rate tend to be fixed for the duration of the loan.

Find out more about how business loans work here.

There are different types of loans

Unsecured loans are when your business borrows money without using its assets as security. Secured loans are when your business borrows money and uses an asset as security. If the repayments aren’t made, the lender can sell the asset to get their money back.

The less you borrow, the quicker you’ll want to pay it off. So you might borrow a smaller amount for a year. Alternatively, you might go for a larger amount and pay it back over a longer time period. 

If you’re a small business, you can get a specialist loan that’s suitable for you. Or, if you’re a start-up company, you could get a loan that’s designed for you.

Can you use the Coronavirus Business Interruption Loan Scheme?

You can apply for the Coronavirus Business Interruption Loan Scheme (CBILS) if you’re a small or medium-sized business. It offers loans and other types of finance, up to £5 million.

You have three years to pay back an overdraft or invoice finance facilities. Or you have six years to pay back loans and asset finance facilities.

To encourage lenders to offer these loans, the government guarantees 80% of the finance to the lender and pays all the interest and fees for a year.

You’re eligible to apply if your business …

  • is UK based

  • has an annual turnover of up to £45 million

  • would be viable were it not for the pandemic

  • has been adversely affected by coronavirus.

Plus, if you’d like to borrow £30,000+, you’ll have to confirm that your business wasn’t already classed as a ‘business in difficulty’ on 31 December 2019.

You can’t apply if you’re a bank, insurer, reinsurer. You also can’t apply if you’re a public-sector body or state-funded primary/secondary school

What’s the Bounce Back Loan Scheme?

If you need to access finance quickly during the coronavirus outbreak, you could use the government’s Bounce Back Loan Scheme (BBLS).

Small and medium-sized businesses can borrow between £2,000 and up to 25% of their turnover. But the maximum available is £50,000.

The government guarantees 100% of the loan, and there are no fees or interest for a year. After that, interest is charged at 2.5%.

You can apply for a BBLS if your business …

  • is UK based

  • was established before 1 March 2020

  • has been negatively affected by coronavirus.

You can’t apply if you’re a bank, insurer, reinsurer. You also can’t apply if you’re a public-sector body or state-funded primary/secondary school.

And you can’t take advantage of the BBLS if you’re already claiming under some of the other coronavirus support schemes. However, if you are, you might be able to transfer that money to the BBLS.

Can you use a personal loan to start a business?

Some lenders allow you to get a personal loan to start a business, but not all of them.

The lender will ask you what you want the loan for, so It's worth checking before you apply for a personal loan. Otherwise you run the risk of being rejected.

Business loans are secured loans specifically designed for businesses.

But it can be tricky to take out a business loan to start your company because most lenders want you to show 2 years of accounts when you apply.

Start up business loans are designed for new businesses.

Personal loansBusiness loans
UnsecuredSecured
Taken out in your nameTaken out in the name of the company
Borrowing amount based on your income and credit recordBased on company finances
Usually up to £25,000Could be up to £5 million
Best APR around 3%*Best APR around 6%*
* Top results on money.co.uk as per December 2019

Discover other ways to get finance for your business

What are the risks of using a personal loan for a business?

If you take out a personal loan for a business, it’ll be in your name. So you’ll be personally responsible for paying it off if the business doesn’t make enough money to cover the repayments.

If you can’t cover them, you could damage your credit rating. This could affect your ability to get credit in future.

Why your credit record matters

How much can I borrow with a business loan?

You can usually borrow £1,000 to £3 million when you get a business loan. But this will depend on your business’s situation and credit rating. It’ll also depend what type of business loan you’re getting and how long you want the term to be.

Make sure you can afford the repayments and think about what you’d do if your financial circumstances changed.

Should I go for a longer-term business loan or shorter-term business loan?

Longer-term loans usually have smaller monthly repayments and lower interest rates. But, because you’ll be paying them back for longer, you’ll pay more interest overall. It could also restrict your monthly cash flow.

It’s usually harder to get approval for a longer-term loan as there’s more risk your financial situation could change.

What information and documents will you need when you apply?

Lenders will need to know how much you’re applying for and what you want it for.

Before you do your application, gather the documents you’ll need. These might include:

  • business bank statements

  • financial statements

  • business tax returns

  • personal tax returns

  • any other legal documents

  • company director proof of address and IDs.

These unsecured and secured loans could help you grow your business, cover running costs or even fund a new company.

Compare business loans

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