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Major banks tend to define “small business loans” as any fixed-term loan of up to £50,000 for businesses meeting specific size criteria. Typically, these loans are available to businesses whose annual turnover or volume of staff is below a specified threshold.
You can use a small business loan for a number of purposes, including purchasing new equipment, consolidating debt and growing your team. As you might expect, lenders will prefer to fund loans that are for developing a business and are backed up by a solid business plan.
Most small business owners would love to scale their company to increase profits, but they don’t have the capital lying around to do so. Small business loans can be the answer, particularly if you’re able to find a loan with a competitive interest rate and terms that suit you. There are a number of finance options available, and this guide will explore the options available to small businesses plus how to compare and choose the best deals.
How does it work?
With a small business loan, you’ll borrow a lump sum of £1,000 to £50,000 upfront. You will need to pay this back over an agreed term, usually with a fixed rate of interest. You can choose a longer loan term if you want to keep monthly repayments down, but bear in mind that the longer the loan, the greater the overall cost.
Most small business loans will be unsecured, but it’s fairly common for lenders to request a personal guarantee.
This type of borrowing can be suitable if you have a one-off expense with a set price and a dependable, steady income to cover repayments for the duration of the loan term.
Government-backed startup loans offer a competitive, unsecured, fixed-rate to individuals looking to start or grow a small business. You can apply online for a loan of between £500 and £25,000, and you will need to pay it back monthly over a term of one to five years. Successful applicants will additionally receive up to 12 months of free business mentoring.
Is my business eligible?
After you apply for a small business loan, the lender will evaluate a number of factors to assess your eligibility, including the following:
Size of business. Small business loans are for small businesses, which lenders will generally specify in terms of your annual turnover or the size of your team.
Age of business. Some (but not all) lenders may require your business to have been trading for a minimum period to be eligible for a loan. By contrast, government-backed startup loans actually require your business to have been around for less than two years.
Turnover. Lenders will assess your turnover in order to measure your ability to pay back the loan. Lenders may state a required minimum and maximum annual turnover that you need to meet to be eligible for a small business loan.
Business financials. As well as turnover, lenders will request to see other financial details, including existing bank accounts and loans, previous tax returns, profit/loss statements and future projections.
Credit record. Your business credit score is an indicator of your company’s reliability when it comes to borrowing money. This will be checked immediately after you make an application.
Your business will also need to be based in the UK.
Lenders usually state their minimum eligibility criteria on their website, so it’s worth checking for this before applying for a loan to avoid disappointment and wasting your own time.
Small business loans and your credit record
Both individuals and businesses have credit scores, and both are likely to be taken into consideration when you apply for a small business loan. Typically, the lowest interest rates will be reserved for individuals and businesses with excellent credit.
When you or your business pays off debts and bills in a timely manner, your credit score rises. Missing repayments causes your score to drop. If your credit score is below a certain level, you may be denied a loan completely, or you may need to offer security for the loan.
Whenever you apply for a loan, you’ll be credit checked, which will result in a small drop in your credit score. For this reason, it’s best to avoid making multiple applications in a short space of time. However, many lenders can run a “soft search” before you apply to give you an idea of the likelihood of you being approved for a loan.
What other options are available to small businesses?
Line of credit. A revolving line of credit could allow you to borrow more money than a business overdraft or credit card, and it could offer a similar degree of flexibility. You’ll usually only pay interest on the amount you borrow and only for the amount of time you borrow it. You’ll have the freedom to repay or top-up as it suits you (subject to credit and minimum repayment limits). Start-up loans for small businesses
Business credit card. Business credit cards work in a similar way to personal cards, but you can add more cardholders and potentially track and manage spending from a centralised platform. You only pay interest on the money you spend, and if you always pay off your balance in full at the end of the month, you usually won’t be charged any interest at all. This form of finance is ideal for very short-term borrowing. Compare business credit cards
Invoice financing. Invoice financing allows you to unlock the value in outstanding invoices. You sell the invoice to the lender for a percentage of its value, allowing you immediate access to funds rather than having to wait for your creditors to pay you. Invoice discounting and factoring
Business credit card. Business credit cards work in a similar way to personal cards, but you can add more cardholders and potentially track and manage spending from a centralised platform. You only pay interest on the money you spend, and if you always pay off your balance in full at the end of the month, you usually won’t be charged any interest at all. This form of finance is ideal for very short-term borrowing. Guide to asset finance
Merchant cash advance. With a merchant cash advance, a lender will give you a lump sum for a fixed fee (rather than ongoing interest). You will need to repay a percentage of all your sales until you have cleared the debt, which makes this an appealing option for businesses with a high degree of fluctuation in their income. Business/merchant cash advances
Peer-to-peer business loan. Peer-to-peer business lending companies connect investors with borrowers without the need for a middleman. These companies have lower overheads, and, in theory, pass these savings onto customers in the form of lower interest rates. Peer-to-peer (P2P) business loans
Business overdraft. A business overdraft is attached to your business bank account, allowing you to overdraw up to a specified limit and making it hassle-free to manage a variable cash flow. However, interest rates on business overdrafts tend not to be competitive and the levels of credit available are relatively low, making this an unpopular option when it comes to growing a small business.
How do I apply?
Once you’ve found the best small business loan to meet your financial needs, you can apply using the following steps:
Apply online. Most lenders allow you to fill out an online application form. You’ll typically begin by providing contact details and other basic business information. You’ll also need to supply detailed financial information about your business, such as turnover, profit/loss statements and future cash-flow projections.
Get approved. The lender may take some time to assess your application. If you’re approved, you’ll receive a quote from the lender with the terms of your loan, which you can then accept.
Receive and use the funds. Processing times vary between lenders, but it’s often possible to access the funds you need on the next business day.
Manage your repayments. You will need to factor your loan repayments into the operating costs of your business and ensure that you pay them on time to avoid costly fees and damage to your credit score.
Bottom line
Small business loans are a fantastic resource for expanding and developing your company. Moreover, when a small business keeps up to date with their repayments, a loan could even boost a business’ credit score. However, as with all loans, it’s best to do some reserach so that you may pick a plan that’s best for you.
Frequently asked questions about small business loans
Lenders will assess your turnover, your credit score and the age of your business among other factors. If you wait until these aspects of your business are healthier, you’ll be more likely to be approved for a loan. If you apply to borrow less money or to repay your loan over a shorter term, this can also boost your odds of being approved.
There are certain lenders who specialise in offering loans to startups or businesses with less sterling financial histories, so you may want to seek these out. However, the rates on these loans tend to be less appealing.
You must use a business loan for business expenses, such as stock, commercial property rent, employee wages etc. Lenders will ask what you intend to use your loan for, and it may support your application if the loan’s purpose is likely to increase profits.
This is the advertised interest rate on a loan. Lenders have to offer this rate to at least 51% of applicants. However, if the lender regards you as a risky applicant, you may be offered a higher rate than this.
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Chris Lilly is Head of publishing at finder.com. He's a specialist in personal finance, from day-to-day banking to investing to borrowing, and is passionate about helping UK consumers make informed decisions about their money. In his spare time Chris likes forcing his kids to exercise more. See full bio
Chris's expertise
Chris has written 602 Finder guides across topics including:
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