If you’re a business in Scotland that’s just starting out or wants to scale up, then a business loan could give you the funds you need to set those growth plans in motion.
Whether you’re in need of a small or a large loan, or want to borrow money for a short timeframe or for the longer term, there’s a range of lenders – and types of loan – for your business to consider.
There are various business finance options to explore, ranging from traditional business loans offered by banks, fintech lenders and government-backed schemes, or alternatives like asset finance or lines of credit.
What type of business loan you opt for can depend, among other things, on what stage your business is at. Much like an individual, a company has a credit record and credit score. The healthier these are, the easier it will be to secure finance. A new business will have a very limited credit history, so a lender will either want to start small or require some form of security.
Loans for launching a new business or for a business which has just been established are often referred to as “startup” loans. These are typically available over terms of 1 to 5 years, and can be government-backed.
More mature businesses have a wider variety of loan options available, thanks to a credit history, a few years of accounts and an established turnover. They might also be able to access other types of credit, such as business credit cards or invoice factoring.
The British Business Bank is a government-backed initiative that operates a scheme called Start Up Loans, which is available in Scotland as well as other parts of the UK.
These particular startup loans are actually personal loans that individuals can apply for if they’re looking to start or grow a business in the UK.
In addition to the financing, successful applicants receive 12 months of free mentoring and exclusive business offers to help their business succeed.
The loan is unsecured, so there’s no need to put forward any assets or guarantors to support an application, plus there are no application or loan set-up fees.
All owners or partners in a business can individually apply for up to £25,000 each, with a maximum of £100,000 available per business.
There’s a fixed interest rate of 6% per annum, and the loan repayment term can be between 1 and 5 years.
While the government-backed Start Up Loans scheme from the British Business Bank is aimed more at new businesses, there are government-backed loan schemes for more established small and medium sized businesses (SMEs).
The main government-backed loans programme in Scotland is the Scottish Growth Scheme, which is operated by Business Loans Scotland.
It offers loans ranging from £25,000 to £250,000, to eligible SMEs across Scotland.
However, in July 2024, the current Scottish government announced that it would not be providing any further funding for the Scottish Growth Scheme.
There are other finance options available to businesses in Scotland, which we take a look at below.
Here are some of the main types of business loans that are available to SMEs in the UK, including Scotland:
As companies looking for a startup loan have been operating for less than 2 years, these loans typically only offer small sums with short terms (typically 1 to 5 years). With little or no accounts to go on, lenders may want to use a personal asset (generally a property) as security for the loan. Government-backed startup loans are available, offering a fixed, low rate of interest for a set period to businesses, and extra security for lenders.
Unlike a startup loan, small business loan eligibility doesn’t necessarily depend on how long a company has been trading. The company does have to be “small” however, and exactly how small varies from lender to lender. Many require a minimum annual turnover. Small business loans can be secured or unsecured, and more often than not charge interest at a fixed rate over terms up to around 60 months (5 years).
If your industry is prone to seasonal variations, this is one scenario that could lead you to consider a short term business loan. As you might imagine, these loans come with higher rates than, say, a 5-year loan, as lenders will need to make the process worth their while. Alternatives to short term business loans include a revolving line of credit, such as a 0% purchase business credit card, or a decent overdraft facility on a business account, although these options typically come with lower credit limits.
With a business credit card, you can borrow what you want (subject to a credit limit), when you want, so you’ll only pay interest for the days on which you borrow. Subject to a monthly minimum repayment, you can also pay back funds on terms that suit you. Unlike a fixed-term loan, which closes when all the money has been repaid, a credit card is a “revolving line of credit”, which means that the facility is effectively always open (which can be a mixed blessing).
Typically spanning over 5 years or more, these loans are designed to fund substantial projects that drive company growth. They may involve larger amounts of money to support ambitious ventures. Expect close scrutiny of your business plan, loan security requirements and a longer, more thorough application process.
Revenue-based financing is a type of business lending where you will receive a lump sum of money for a percentage of your business’ revenue. Unlike traditional business loans, your monthly repayments may fluctuate with your revenue stream. So, if you’re having a particularly slow month, you will repay less and your repayment term will be longer.
Peer-to-peer (P2P) loans aim to connect investors with SMEs looking for finance. By cutting out the overheads normally associated with high street banks, these companies are often able to offer more competitive rates.
Having limited or poor credit history can make it challenging to find a lender who is willing to provide financing for you or your business. However, there are many lenders that provide bad credit business loans, as well as a number of other finance options.
A commercial mortgage is one that is taken out on a property that will be used for business or commercial purposes, and not as a residence. Commercial mortgages can be more complicated than personal mortgages, and you’re likely to need a bigger deposit.
There are two main types of invoice finance: factoring and discounting. Both offer support to businesses with fluctuating turnover due to relying on clients paying their invoices. Invoice finance lets you borrow funds against the value of your unpaid invoices, minus a small fee.
If your business is in need of acquiring an expensive piece of equipment, like a vehicle, machinery, or computer system, asset finance could be an option worth considering. Instead of having to cover the cost upfront, you can pay it off in smaller instalments. Unlike a regular business loan, asset finance is secured against the cost of the asset itself. If you fail to repay the loan, the lender has the ability to take ownership of the asset.
Business cash advances can be useful for small businesses that have inconsistent sales or process most of their sales through card transactions. You can effectively get funds upfront and that is then paid off using a percentage of future sales.
Regular cash flow can be a big concern for many businesses, and that is one of the advantages of a business line of credit. Instead of receiving a lump sum upfront like you would on a normal business loan, a line of credit gives you ongoing access to funds to use as you wish. You only pay interest on the amount of credit you use, but will need to repay what you’ve used in order to access the full limit again.
Here are some of the key features to consider when comparing business loans:
Each lender will have its own eligibility criteria. Some common things that are usually on the list include:
So what happens if your business is too young or too small to qualify for a loan with decent terms? Or maybe it’s just a bad time to take on debt? You still have other financing options.
If your business requires additional credit, you also might want to consider taking out a business credit card. Whether you’re running a startup or a large established company, business credit cards offer a range of benefits that can help you better manage your finances.
Business credit cards offer greater control over your cash flow, enabling you to address revenue gaps and free up additional capital for reinvestment in your business. You can also use a business card to increase your company’s spending power, better manage your expenses, and even earn business-focused rewards.
Business loans can be a good option if you’re looking to borrow a large amount of money over a longer period and at a lower cost than a business credit card.
It can sometimes be hard to meet the eligibility criteria for a business loan, so it’s worth exploring government-backed business loan schemes (especially if you’re a startup), as well as other types of business funding, such as invoice finance.
The Co-operative Bank offers variable-rate business loans to existing business current account holders.
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