Table of Contents
- Unsecured business loans
- Secured business loans
- Start up business loans
- Short-term business loans
- Sole trader loans
- Limited company loans
- Bad credit business loans
- Working capital loans
- Invoice financing
- Asset financing
- Lines of credit
- Merchant cash advance
- Government loans
- How to find the right type of business loan through NerdWallet UK
A business loan may be worth exploring if your small business needs extra funds to grow or run day-to-day. There are several types of business loans available, each catering to different businesses and their varying needs.
All must be repaid with interest, but the exact way they work varies. Read on to find out more about the options on offer, what each might be used for, and which may be a good match for your business.
Unsecured business loans
With an unsecured business loan, you don’t put forward any kind of security to act as collateral for the loan. This can make unsecured loans a good option if you have a relatively new business with few assets, or you don’t want to risk the assets you do have.
Lenders will look at a range of factors, including your overall business finances and your business credit rating, to work out whether to offer you a loan. The lump sum you borrow, plus interest, is repaid in fixed instalments over an agreed period.
Because there is no security, interest rates on unsecured loans tend to be higher than on secured loans, but application is more straightforward.
Although these loans are unsecured, some lenders may require a personal guarantee. This is when a company owner or director promises to repay the loan if their business can’t, making you personally responsible for the debt.
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Secured business loans
A secured business loan requires you to put forward an asset as security for the loan. This could be your business premises or another high-value asset such as equipment or a vehicle.
The risk as a borrower is that the lender is entitled to take the asset if the loan isn’t repaid.
However, the extra reassurance enjoyed by lenders means that interest rates may be lower, and loan amounts larger, with a secured loan. The security may also mean you have a better chance of getting a secured loan with poor or bad credit.
Start up business loans
A start up loan is aimed at new or younger businesses that have typically been trading for less than three years. The funds are often used to help businesses get up and running.
A lack of trading history means lenders will look more closely at your business plan and forecasts when deciding whether to offer you a loan. Your personal credit score may be more important too.
While secured start up loans are available, many are unsecured, due to newer businesses being less likely to have assets to use as security.
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Short-term business loans
As the name suggests, a short-term business loan is a type of loan that’s designed to be repaid over a shorter period of time.
These are often used if your business needs to cover an emergency expense or any kind of immediate cost.
However, with these kinds of loans, your business would usually need to repay it within a few months, or possibly up to two years. As a result, you would need to be confident that your business could afford to repay the loan in full.
It is normally fairly quick to apply for a short-term business loan, but the interest rates may be higher than on a longer-term loan.
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Sole trader loans
A sole trader business loan provides a way to raise funding if you’ve set up as a sole trader. Usually, this means you both own and run the business, are entitled to its profits, but are also responsible for its debts. Sole traders are often self-employed, freelancers or contractors, with the loans often being tailored towards the needs of these groups.
Sole trader loans could be either secured or unsecured, though interest rates may be higher, because greater risk is often attached to lending to sole traders.
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Limited company loans
Limited company loans are for businesses set up as limited companies with Companies House. If your company is limited, there’s a clear separation between your personal finances and those of your business – a major difference to being a sole trader.
This often makes it easier to get a loan, interest rates slightly lower. It also means your business is directly responsible for loan repayments, rather than you. Secured and unsecured options are available.
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Bad credit business loans
You could consider a bad credit business loan if poor credit is preventing you from getting funding elsewhere. Unsecured loans may be available if you provide a personal guarantee, but secured loans are often easier to get with bad credit. This is because lenders know they have security to fall back on if repayments aren’t made.
However, the risk of losing assets means you must think carefully. Interest rates will almost certainly be higher and you’ll find there are fewer lenders to choose from.
» MORE: Getting a business loan with bad credit
Working capital loans
Working capital loans are a type of short-term finance for businesses. They can be used to help cover gaps in cash flow, allowing you to carry on running your business if you don’t always have the cash in your account to pay bills or buy stock. This may particularly be the case if you have a seasonal business that experiences peaks and troughs in income throughout the year. A working capital loan is designed to cover this kind of shortfall in your finances.
However, you need to be certain that your business will have the cash in the future to allow you to repay the loan in full and on time.
» MORE: Working capital explained
Invoice financing
Invoice financing is a secured form of business finance, where the amount you borrow is based on the value of your unpaid invoices.
Rather than waiting for a customer to pay an invoice, if you need to access cash relatively quickly, you could ‘hand over’ the invoice to a lender. The lender may then offer you a loan, up to a percentage of the value of the invoice, which you’ll repay later. You can typically access between 70% and 90% of an invoice’s value.
Different options are available. Invoice factoring sees the lender take control of the invoice and responsibility for chasing payment. It also means the customer who needs to pay the invoice will pay them directly. Alternatively, there is invoice discounting, where you continue to ‘manage’ the invoices and customers still pay you. You then pay the lender as per the terms of your agreement.
» MORE: Invoice financing explained
Asset financing
Asset finance is a type of secured borrowing which can help you buy or refinance assets that your business needs. This may allow you to acquire equipment or machinery that you can’t afford to buy outright.
Asset finance can work in a number of different ways. One option is a lease agreement, where you pay a sum each month to use a piece of equipment for an agreed period of time, before returning the item.
Alternatively, you may be able to spread the cost of an asset over a set period, and eventually own it outright once all the payments are made.
» MORE: Asset finance explained
Lines of credit
A business credit line, or line of credit, is a type of finance where you can borrow as much or as little as you need from a maximum credit amount set by the lender. Importantly, interest is only paid on the amount you borrow, not the whole credit limit, offering flexibility and a safety net.
Some credit lines are ‘revolving’ meaning that once you pay back what you owe, you can access the full amount again, assuming you stick to the terms of the agreement.
Lines of credit can be both secured and unsecured.
Merchant cash advance
A merchant cash advance may be an option if your business regularly receives payment through card transactions. Essentially, when a customer pays via a card terminal, a percentage of the transaction is deducted and goes towards paying off the loan. Repayments are made solely this way, meaning you don’t have to make a minimum or fixed repayment each month.
Understandably, loan amounts depend heavily on how much money your business makes from card transactions each month.
Government loans
To help businesses develop and grow, there are a number of national and regional government business loans.
One example is the Start Up Loans scheme which offers loans of up to £25,000 to businesses that have been trading for under three years.
Alternatively, the Growth Guarantee Scheme allows small businesses access to a variety of finance options.
How to find the right type of business loan through NerdWallet UK
We can help match you with the types of business loans that suit your needs. The lenders flagged for you from our panel will also give you the best chance of being accepted. To find the right loans and lenders for you fast, without affecting your credit score:
- Answer a few questions about you and your business, so we know what you need.
- Get matched instantly with suitable products that you’re eligible for.
- Compare products and apply to your chosen lender, without having to repeat-fill forms.
» COMPARE: Find the right loan for your business today
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