How to get a business loan

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.

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What is a business loan?

A business loan is a loan you take out to support your business growth or to cover periods of uneven income. There are lots of different places you can get a business loan from and once approved you will then pay it 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.

In the same way as applying for a personal loan, you will need to show a lender what your income is and how you plan to repay the loan. 

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. 

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

The two main types of loans are unsecured and secured.

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. 

Not all business loans are the same and you need to find one right for your situation. If you’re a small business, for example, 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 get any help from the government’s Coronavirus loan scheme?

The government offered a package of help for businesses during the coronavirus lockdowns to help them stay afloat and continue to employ their staff.

They included the Coronavirus Business Interruption Loan Scheme (CBILS) and the Bounce Back Loan Scheme (BBLS).

Both of these have now closed for new applicants, but here is what was available at the time.

  • The CBILS was for small or medium-sized businesses. It offered loans and other types of finance, of up to £5 million.

  • If you took out one of these loans, you may still be paying it back. Depending on your business, you will have had either three or six years to clear the loan. 

  • To encourage lenders to offer these loans, the government guaranteed 80% of the finance to the lender and paid all the interest and fees for the first year. 

  • Businesses were only able to apply if they were UK based with a turnover of up to £45million and had been adversely affected by the pandemic. 

The other type of loan available, of between £2,000 and 25% of turnover, was the Bounce Back Loan Scheme (BBLS). 

  • The government guaranteed 100% of the loan, and there were no fees or interest for the first year. After that, interest is charged at 2.5%.

  • Businesses were able to apply if they were based in the UK, established before 1 March 2020, and negatively affected by coronavirus.

  • However, those claiming under another coronavirus support scheme weren’t able to apply. 

While you can no longer apply for these schemes, there may still be help available for you if your business has suffered because of the pandemic. 

It’s well worth contacting your local council to ask what support it can offer as well as organisations such as the Federation of Small Businesses

Can you use a personal loan to start a business?

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 two years of accounts when you apply.

If you don’t take out a business loan, it may be possible to use a personal loan to start a business.

When you apply, the lender will ask you what you want the loan for, so It's worth checking before you apply for a personal loan if starting a business is a valid reason. Otherwise, you run the risk of being rejected.

There are also start-up business loans that 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 in October 2021

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 the future.

Why your credit record matters

Can you apply for a Peer-to-Peer loan?

Peer-to-peer (P2P) loans are relatively new when it comes to business lending but they’re an option many people use when they need some extra cash.

They work by a lender, or investor, giving their money to a small business. It might be one person lending you the money or a pool of people who all lend a small amount. 

The lender earns interest on the loan and the small business then pays it back, in the same way as if the loan was from a bank.

This is a good idea for businesses as often they have a better chance at securing funding than going to a bank. 

However, there are some risks involved for a borrower such as the fact that P2P lending isn’t fully covered yet by the Financial Services Compensation Scheme (FSCS). This means if the P2P lending platform goes bust, borrowers may find it difficult to get their money back. However, most P2P platforms have robust measures in place to stop this happening. 

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 on 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?

How long you repay a loan for will depend on your business and its finances. 

Longer-term loans usually have smaller monthly repayments and lower interest rates. But you’ll be paying them back for longer so 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 the money 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.