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November 24, 2023

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What is a business loan?

A business loan is a way to get extra funds to run or grow your business successfully. The loan could cover rent for your business’ property, employee salaries or opening new offices. 

This finance option is available for existing companies or startups and works in a similar way to a personal loan. For example, your business borrows an amount of money and then this is repaid in instalments over an agreed time by the lender. 

You can borrow as little as £500 or as much as £5 million. Every loan provider sets different limits on how much they’re willing to lend. This means your choices for a lender may be limited by the amount you wish to borrow.

The government also offers business loans, including the Start Up Loan scheme which aims to help small businesses via a loan of £500 to £25,000. 


There are different types of business loans, including unsecured and secured."

How do I get a business loan?

If you would like a loan for your business then the first step is applying for one with a suitable lender. You’ll need to tell them what it’s for and illustrate your current financial situation so that they can see how you’ll repay the loan. 

During the application process you’ll also need to decide how long it’ll take to repay. This can range from one year to 30 years, depending on whether you choose a medium or long-term loan. 

The longer your loan term, the lower your monthly payments will be, but you'll pay more in interest overall. Our loan repayment calculator can help you determine how long you need to repay your loan based on how much you can afford to pay every month.

What do you need to apply for a business loan?

You will need a variety of documents to secure a business loan.

These include financial statements, personal tax returns, business tax returns, business bank statements and company director proof of address and IDs.

Who is eligible for a business loan?

To be eligible you’ll need to be over 18, a current UK resident and pass credit checks. It’s important to check the specific terms and conditions for each loan to make sure your business fits the criteria.


Types of business loans available

Secured business loan

A secured business loan means you need to provide assets as security to cover the amount being borrowed. Assets can include property or company shares.

View secured business loans

Startup business loan

A startup loan works in the same way as a business loan but is specifically for funding a new business or one that has been trading for less than 36 months.

View startup business loans

Unsecured business loan

A loan of this type makes it possible for your business to borrow money without having to offer any assets (including real estate) as security.

Find out more about business loans

Types of business loans available

Secured business loan

A secured business loan means you need to provide assets as security to cover the amount being borrowed. Assets can include property or company shares.

View secured business loans

Startup business loan

A startup loan works in the same way as a business loan but is specifically for funding a new business or one that has been trading for less than 36 months.

View startup business loans

Unsecured business loan

A loan of this type makes it possible for your business to borrow money without having to offer any assets (including real estate) as security.

Find out more about business loans

What should I consider when looking for a business loan?

If you would like a business loan then you’ll want to make sure that you secure it seamlessly. Therefore, it’s a good idea to do some preparation before applying.

For example, check your credit report as this is what lenders will do, so it’s best to improve your credit score before applying.

You should also check your business accounts to ensure that everything is in order and organise your finances accordingly, whether that is settling any debt or ensuring you can demonstrate a positive cash flow.

It's also important to keep an eye on interest rates as this will impact the loan. The Bank of England releases data each month on SME loans, so this will give you a clear view of the market. For example, in June the effective interest rate on new loans to SMEs saw an increase, from 6.86% to 7.13%.

Gross lending (excluding overdrafts) to SMEs by all UK banks in 2022[1]
£65.1billion

How to apply for a business loan

Before choosing your business loan, consider the following steps...

Research the type of loan you need

It’s important to know which type of loan is best suited for your business, so always explore the options available to you before making a decision.

Decide how much you would like to borrow

You’ll need to work out how much money you need to ensure the loan can fund your business’ goals. It’s also essential to know how long you’ll need to repay the loan.

Check any conditions attached to the loan

Lenders will have different criteria depending on the loan, so make sure that you can adhere to the conditions and repay the money when needed.

Apply for a business loan

Once you’ve followed these steps you’ll be ready to fill out an application with your financial details.

Pros and cons

Pros

Help provide funding for expansion plans
Be used to overcome temporary cashflow problems
Offer capital for startup companies

Cons

Tough eligibility criteria
Repayments that eat into cash flow
High interest rates for businesses with poor credit

Other business finance options

Crowdfunding

Crowdfunding is when you pitch your business idea online and offer perks or rewards to investors if your target is met. It can be a good alternative to startup business loans for new business ventures.

Bank loans

These are offered by banks and building societies and can be up to £250,000 over one to 15 years. They're usually unsecured loans.

Credit cards

A business credit card is good for day-to-day transactions and expenses, plus several members of staff can have a card. But remember that they're not great for long-term borrowing as most charge a high interest rate once the introduction period ends.

Government grants

Government grants help businesses in certain sectors, or businesses in specific areas of the UK. The good thing about grants is that you don't have to pay the money back, and you keep full ownership of your business.

Other business finance options

Crowdfunding

Crowdfunding is when you pitch your business idea online and offer perks or rewards to investors if your target is met. It can be a good alternative to startup business loans for new business ventures.

Bank loans

These are offered by banks and building societies and can be up to £250,000 over one to 15 years. They're usually unsecured loans.

Credit cards

A business credit card is good for day-to-day transactions and expenses, plus several members of staff can have a card. But remember that they're not great for long-term borrowing as most charge a high interest rate once the introduction period ends.

Government grants

Government grants help businesses in certain sectors, or businesses in specific areas of the UK. The good thing about grants is that you don't have to pay the money back, and you keep full ownership of your business.

FAQs

Do I need a business account for a business loan?

In terms of whether you need a business account for a business loan, it depends on the loan and lender. Some banks may insist that you have a business current account with them before they will accept you for a loan.

Do I need to be the owner of a company to get a loan?

No, you don't need to be the owner of a company to get a loan. Registered company directors can apply for most business loans.

Can my small business get a loan?

Yes, small businesses can get loans, but you may be offered different ones depending on your firm's size and revenue. For instance, only new businesses can get government start-up loans.

Does my business have a credit record?

Yes, your business does have a credit record and it may affect whether or not your loan application will be accepted. You can find the credit score for your business on the Experian website.

Could I lose my home if my business defaults?

You could lose your home if your business defaults. It all depends on the type of loan you choose, whether it is secured against your home and if you sign a director guarantee. Always check the terms and conditions carefully before agreeing to any loan.

About the author

Author imageLucinda O'Brien
Lucinda O'Brien
Lucinda O'Brien has spent the past 10 years writing and editing content for regional and national titles. She applies her industry knowledge to ensure readers can make confident financial decisions.

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References

1. Stats according to Bank of England Gross lending (excluding overdrafts) to SMEs by all UK banks in 2022 was £65.1 billion, according to the Bank of England. This was up 12.8% from £57.7 billion in 2021 and is the second-highest number on record.