1. Home
  2. Business Loans
  3. What is a Business Loan?
Published 01 June 2022

What is a Business Loan?

A business loan can be used for a variety of reasons, from buying new equipment to covering temporary cash flow shortages. Learn more about the different types of business loan and all you need to know before you apply.

Whether you’re a newly established start up or you’ve been running your business for years, there is likely to come a time when you need some extra funding.

When that time comes, you may not have the ready cash available to pay for all you need, in which case you may want to consider a business loan.

Read on to find out more about business loans, including their main features and what you can use them for.

Features of business loans

Business loans are a form of borrowing that allow businesses to access finance when they need it.

There are several types of business loans available that work in slightly different ways, but some of their main features include:

The fact that business loans need to be repaid with interest is the main factor that differentiates loans from grants, which are non-repayable.

Unlike personal lending, where all lenders need to be regulated by the Financial Conduct Authority (FCA), most business lending is unregulated.

However, lenders do typically need to be regulated to offer loans to sole traders, partnerships with fewer than four partners, or any unincorporated association.

» MORE: How do business loans work?

Types of business loan

There are several types of business loans that are designed for different kinds of businesses and requirements. For example, some of the main types include:

What can you use business loans for?

Business loans can be used for a variety of different business-related purposes. For example, you could use a business loan to cover the cost of:

Pros and cons of a business loan

If your business needs extra finance, a business loan could be a good idea. Some of the advantages of taking out a business loan include:

However, before applying for a loan, it’s important to be aware of the risks involved so you can be sure that a loan is definitely the right course for your business.

Some of the potential disadvantages to bear in mind include:

» MORE: Pros and cons of bank loans for businesses

Who can get a business loan?

As a rule, to qualify for a business loan you will need to be at least 18 years old and a UK resident.

Lenders may set their own individual criteria beyond this, such as a minimum number of years’ trading history or a minimum turnover.

Your credit history will also be a factor that lenders consider to determine whether you’re eligible for a business loan.

Lenders will look at your business credit rating and, in some cases, your personal credit history to see how you have managed your finances and credit responsibilities in the past. They will use this information, alongside other details about your business, to make a decision on your loan application.

Even if you have 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, and the lender may require some form of security or guarantee.

How can you apply for a business loan?

Many providers offer business loans, including high street banks and online lenders.

To help you find a loan that’s suitable for your business, you can compare loans and check your eligibility without affecting your credit rating. This will allow you to see which business loans you could qualify for and how much you could potentially borrow.

When you apply for a business loan, the lender will need to know some key information about your business, such as:

Image source: Getty Images

About the Author

Rhiannon Philps

Rhiannon has been writing about personal finance for over three years, specialising in energy, motoring, credit cards and lending. After graduating from the University of Cambridge with a degree in…

Read More
Dive even deeper
Is Faceless Banking the Future for UK Businesses? 

Is Faceless Banking the Future for UK Businesses? 

We asked 500 decision makers from UK businesses what they thought of online-only, or ‘faceless’, business banking providers. Generally, businesses are moving toward an acceptance of online-only banking. Here, we take a deep dive into the results of our survey.

Entrepreneur Spotlight: Maya Haiman-Eilon of Mont58 Coffee

Entrepreneur Spotlight: Maya Haiman-Eilon of Mont58 Coffee

For NerdWallet’s Entrepreneur Spotlight series, Maya Haiman-Eilon, co-founder of Mont58 Coffee, spoke to us about the importance of sustainability, and how the business has dealt with rising costs.

How the Business Energy Bills Discount Scheme Works

How the Business Energy Bills Discount Scheme Works

The Energy Bills Discount Scheme isn’t a business energy price cap, but it does offer businesses money off their energy bills. We explain how the scheme works.

Back To Top