Business Loans

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Business loans are available for companies of all sizes and industries
There are many types of business loan, designed to suit particular commercial needs
You can compare loan amounts and term lengths in our comparison tables

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Information written by Rhiannon Philps , Brean Horne Last updated on 05 July 2022.

What is a 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:

Repayment terms: Business loan repayments are made monthly with interest paid over an agreed period. So your business will know where it stands with how much you need to pay back and by when.
Equity: You can secure finance without handing over a share of your business.
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: More reasons to consider getting a business loan

What is the difference between a business loan and a personal loan?

Business loans tend to be cheaper than personal loans. Lenders usually offer lower interest rates and more attractive repayment terms. Businesses could borrow larger sums of money via a business loan, compared to a personal loan. However, not all businesses will be eligible for a business loan – for example, start ups may struggle to get a business loan and will need to potentially look to personal loans to inject cash into their new business.

» MORE: Business loans vs personal loans: How do they compare?

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

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

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

How do small business loans work?

Small business loans are for start ups and small businesses to access funding. They are 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.

How much money can I get with a small business loan?

The amount of money you can get with a small business loan varies depending on your company’s financial history and the lender. Typically, companies can borrow between £1,000 and £500,000 with a small business loan.

What’s the difference between large and small business loans?

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

Is a business loan right for me?

Most business owners will find themselves looking for extra finance at some point. But with so many finance options and lenders to choose from, you may feel overwhelmed and unsure where to begin your search for a loan. There are a few fundamental questions you can ask yourself to help you decide whether a business loan could be right for you.

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

Am I 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 like:

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?

How can I get a business loan?

You could get a business loan from a bank or other lender. To make a decision on your loan application and to offer you a quote, lenders will need to know some information about you and your business, such as:

the name of your business
your contact details (address, phone number, email)
how long your business has been trading
details about your company finances and revenue
how much you want to borrow
what you want the money for (expansion, equipment, improved cash flow, marketing)
how long you want to borrow the money for

Shopping around might help you get a business loan that best suits your needs. You can then use our comparison table to search through the business loans available and find the right one for your company.

In addition, it helps to have all the relevant information and documents to hand, such as your company’s bank statements and accounts when applying for a business loan to help you find deals that you may be eligible for.

How much will a business loan cost?

The cost of a business loan 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.

What are interest rates on business loans?

The interest rates on business loans will vary depending on the lender and your financial history. Secured business loans typically charge interest between 4% and 20%, while most unsecured business loans charge 7% to 20% in annual interest. 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 much can I borrow and how long for?

The amount of money you can borrow for a business loan and the repayment term will depend on your financial history and 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.

Pros and cons of business loans

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.

But there are some of the disadvantages to consider with business loans:

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.
Missed or late repayments can negatively affect your business credit rating.
Business loan repayments may affect your cash flow and long-term business growth.

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 offer pre-approved loans in less than 60 seconds. While others may take weeks or months to approve your loan and payment.

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:

Government and local community grants: Schemes and grants that lend money to businesses for a variety of purposes.
Crowdfunding: Setting up a profile on a crowdfunding platform to raise funds from members of the public.
Angel investors: Encouraging investors to buy shares in your company to get funding.
Business overdraft: Borrowing money through a business bank account for a short period of time.
Merchant cash advance: A merchant cash advance loan allows businesses to borrow against future debit or credit card payments made by customers.
Business credit card: Using a credit card for short-term borrowing.
Peer-to-peer lending: Borrowing money from individuals using a peer-to-peer lending platform.

» MORE: Start up funding options

Business Loan FAQs

Do I need to be a UK business to apply for a loan?

Usually you need to be a UK-based business to apply for a business loan in the UK.

What documents do I need to apply for a business loan?

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 to provide evidence of your UK residency
your business plan and financial details

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.

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

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.

When do I need to pay back my business loan?

The repayment period for your business loan will vary depending on how much you borrow and your lender. The typical repayment period for a business loan is one to five years.

Are business loans tax-deductible?

The interest paid on business loans may be tax-deductible. Tax relief isn’t available on the capital element of a business loan. You should speak to a qualified accountant for specific tax advice.

Can I repay my business loan early?

Some lenders allow you to repay your business loan early without incurring any fees. But it’s important to check whether you’ll be charged for clearing your debt early before applying for business funding, as you may be caught out by unexpected costs if they do.

About the author:

Rhiannon is a financial writer for NerdWallet, with a particular interest in personal finance and insurance guides for consumers. Read more

Brean is a personal finance writer at NerdWallet. She covers a range of financial topics and has written for consumer titles including Which?, Moneywise and The Motley Fool. Read more