- A business loan can provide the funding your business might need day-to-day, to expand, or to get started.
- There are different types of business loan suited to different business needs.
- Comparing business loans is the best way to find the right option for you.
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A business loan is a way of borrowing funds that can be used to help support or grow your business. In many respects, business loans are just like personal loans – the main difference is that funds are taken out in the name of, and used by, your business.
Several borrowing options are available, from start-up business loans through to secured business loans, invoice finance, and more. The one which is right for you depends mainly on your business and the reason you need the loan.
What are business loans?
A business loan is a financial arrangement which sees a lender loan funds to a business. The amount that is borrowed, plus the interest payable on that loan amount, is usually paid back in monthly instalments over a set period of time (known as the loan term). Once all of the repayments have been made, everything that is owed should be cleared.
How does a business loan work?
If you apply for a business loan, a lender looks at various factors before deciding whether to approve the loan or not. Typically these include your business’s finances, credit history, business plans and financial outlook. Your own credit score, assuming you’re the business owner, is usually considered too. Essentially, the lender wants to make sure the loan repayments are affordable and the money it lends you will be paid back.
If the loan is approved, and you decide to proceed, the loan amount is usually transferred to your business bank account. To repay the loan, monthly repayments must then be made for the duration of the loan term, both of which will have been agreed with the lender.
» MORE: How do business loans work?
What’s the difference between a business loan and a personal loan?
The main difference is that business loans are designed specifically for businesses while personal loans are for individuals. Business loans may also be available over longer terms and for higher amounts. But how they work generally, in terms of money being borrowed and then repaid over a certain period of time, is broadly the same.
» MORE: Business loans vs personal loans
What types of business loan can you get?
There are several types of business loans that are designed for different kinds of businesses and requirements, but the two main options are:
Unsecured business loans
An unsecured business loan can be taken out without having to use any assets from your business as security for the loan. This means unsecured loans are often quicker and easier to arrange, but interest rates may be higher. Lenders may also ask for a personal guarantee that you’ll repay the loan from your own personal funds if your business can’t.
Secured business loans
A secured business loan can only be taken out if you’re willing to put forward an asset from your business as security, such as your business premises. This often means you can borrow larger sums of money and access lower interest rates with a secured loan. However, there is also the risk that the lender will repossess the asset used as collateral if you fail to repay the loan.
Other business loan options
Other types of business loan include:
- Start-up business loans: These are loans primarily for businesses that are new or just getting going.
- Lines of credit: Rather than a lump sum, a line of credit gives access to a set amount of credit from which your business can borrow as much or as little as needed. Interest is only paid on the amount that is used.
- Working capital loans: These short-term loans are designed to cover a business’s everyday running costs, such as rent and utility bills.
- Cash flow loans: A cash flow loan can typically be arranged quickly, without necessarily needing assets or a good credit history, if short term cash flows are challenging.
- Invoice financing: Invoice finance allows a business to raise funds based on the security of unpaid invoices.
- Asset financing: Asset finance provides a way to access equipment, machinery, or other assets without paying for it up front. Instead, payments are made to cover the cost over an agreed period.
- Merchant cash advances: These loans are based on your projected sales and repaid by deducting a percentage from your debit and credit card takings.
- Peer to peer loans: Rather than borrowing from a traditional lender, individuals or businesses lend directly to each other.
- VAT loans: These loans can help spread the cost of meeting tax obligations.
» MORE: Finding the right type of business loan
What can a business loan be used for?
Business loans can be used for a variety of different business-related purposes, such as:
- buying new equipment or machinery
- buying premises
- purchasing stock
- covering startup costs
- improving cash flow
- covering running costs
- hiring new employees
- buying another business
- advertising and marketing
- debt consolidation
When applying for a business loan, it’s normal for a lender to ask how the funds being borrowed will be used.
What are the eligibility requirements for a business loan?
You will usually need to be at least 18 years old, a UK resident, and running or planning to start a UK-based business to be eligible for a business loan.
Lenders set their own qualifying criteria beyond this. This may include a minimum number of years’ trading history or a minimum turnover. For new or younger businesses, proving your business is financially viable will be important.
The credit history of your business may also be a factor that lenders consider, as could your personal credit history. This is because lenders want to see how you have managed your finances and credit responsibilities in the past.
Even if you or your business has a less-than-perfect credit history, some lenders may still offer you a loan. However, you are likely to face higher interest rates than a business with a better credit rating. The lender may also require some form of security or personal guarantee.
» MORE: Try our business loan calculator
How to apply for a business loan
Depending on the lender, you may be able to apply for a business loan online, over the phone, or perhaps in a branch.
When applying, the lender will need to know some key information about your business, such as:
- details about you and any other company directors
- your Companies House registration number (if applicable)
- details about your business finances, including profit and loss statements
- a business plan
- your cash flow forecast
» MORE: How to get a business loan
Find a business loan to suit you
A business loan can help get your business off the ground or provide a chance to push it to the next level. There are pros and cons of business loans you should consider, and the various loan options need navigating. But NerdWallet is here to help you find the right loan for you and your business.
» MORE: Compare best business loans
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