Business loans play a critical role in the success of SMEs, from expanding operations and investing in new equipment to managing cash flow and overcoming unexpected expenses. However, navigating the complex business lending world can be overwhelming, with various loan options and eligibility criteria to consider.

This article aims to provide a comprehensive guide to business loans, including an overview of different loan types, eligibility criteria, the application process, and factors to consider when choosing a loan.

By the end of this article, small business owners should have a better understanding of how to secure the funding they need to achieve their business goals.

funding options

Types of business loan

There are many different types of business loans. Below, we’ve listed some of the key categories you may encounter. NB these are not mutually exclusive; you might find a ‘bad credit loan for small business’, for example.

Type of LoanDescription
SecuredRequires collateral
UnsecuredAvailable to businesses without security/collateral
Bad CreditHigh-interest loans for businesses with low credit scores
Small BusinessCater to businesses with smaller turnovers
Short TermLoans for durations of 2 months to 2 years
Fast LoansDesigned to deliver cash quickly, sometimes within a day
Bridging LoanA short-term loan used to bridge the gap between the purchase of a new property and the sale of an existing one
Government-backed start-up loanA government-backed start-up loan is a form of financial support provided by the government to assist new businesses in their early stages.

Secured Business Loans

Secured business loans are a type of financing where the borrower must offer some form of collateral to back the loan. This collateral could be property, equipment, or other assets owned by the business. In the event of a default, the lender has the right to seize the collateral to recover the outstanding loan amount. These loans are often preferred by lenders due to their reduced risk, and as such, they typically come with lower interest rates compared to other loan types.

Unsecured Business Loans

Unsecured business loans are funds lent to businesses without the need for any collateral or security. Because there’s no requirement for security, these loans are typically higher risk for lenders, and as a result, they may have higher interest rates and stricter credit requirements. They’re often used for short-term funding needs or when a business lacks substantial assets to offer as collateral.

Bad Credit Business Loans

Bad credit business loans are designed for businesses with low credit scores that may struggle to secure traditional financing. Due to the higher risk involved, these loans often come with higher interest rates and more stringent repayment terms. While not ideal, they can provide a necessary lifeline for businesses needing to finance operations, growth, or other expenses.

Small Business Loans

Small business loans cater specifically to businesses with smaller turnovers or those at an early stage of development. They can be secured or unsecured, and they typically offer more favorable terms for smaller businesses, taking into account their unique financial challenges and capabilities. These loans are often used to finance growth, purchase equipment, or cover operational costs.

Short-Term Business Loans

Short-term business loans are loans typically designed to be repaid within a period of two months to two years. They are often used by businesses for immediate financial needs, such as covering temporary cash flow shortfalls, purchasing inventory, or managing unexpected expenses. They typically have a straightforward application and approval process but often come with higher interest rates due to their short repayment period.

Fast Business Loans

Fast business loans are designed to deliver cash quickly to businesses, sometimes within a day. These loans are typically best suited for emergencies or urgent cash flow problems. While they offer the advantage of quick access to funds, they often come with higher interest rates and stricter repayment terms due to the increased risk for the lender.

Bridging Loans

A bridging loan is a short-term loan designed to bridge the gap between the purchase of a new property and the sale of an existing one. In a business context, this can be useful when moving business locations or acquiring new properties for expansion. The primary property usually serves as collateral, and once it is sold, the proceeds are used to repay the bridging loan.

Government-Backed Start-up Loans

Government-backed start-up loans are financing options supported by the government to encourage entrepreneurship and stimulate economic growth. These loans typically offer favorable terms, such as lower interest rates and longer repayment periods, to make it easier for start-ups to succeed. The government usually guarantees a portion of the loan, reducing the risk for lenders and making it easier for businesses with less established credit histories to secure funding.

What are the eligibility criteria for business loans?

While many variables are at play for loan eligibility, here are some common factors.

  • Business Structure: The type of business structure, such as sole trader, partnership, limited liability company (LLC), or limited company, can impact eligibility for business loans in the UK. Some lenders may have specific requirements for the type of business structure they will lend to.
  • Credit Score: A good credit score is often a key factor in determining loan eligibility. Lenders use credit scores to evaluate a business’s creditworthiness and determine the likelihood of loan repayment. The business should not have outstanding marks on its credit, CCJs, or other signs of owing money.
  • Time in Business: Most lenders consider the length of time a business has been operating when evaluating loan applications. The business should have a trading history of more than two years.
  • Annual Revenue: Annual revenue is another key factor in loan eligibility. Lenders want to see that a business has a steady source of income and that the loan amount is less than 25% of the business’s annual turnover.
  • Financial Statements: Lenders typically require business owners to provide financial statements, such as balance sheets, income statements, and cash flow projections, to help evaluate the business’s health and determine loan eligibility.
  • Industry and Purpose of Loan: Some industries and purposes of loans may be considered riskier by lenders so eligibility criteria may be stricter.
  • Business Registration: The business should be registered in the UK.

If you fall outside these criteria, there are still many ways to borrow money, but you will pay extra for the privilege.

To gain access to the best rates, you need to show you’re an established business with a good cash flow and credit and that the money you’re borrowing is a reasonable amount compared to your company size.

What are the interest rates for a business loan?

Interest rates for business loans vary depending on several factors, such as the lender, the type of loan, the loan amount, the credit score of the business owner, and the business’s financial history.

For alternative lenders, interest rates can range from a few percentage points to over 20%. It’s essential to shop around and compare rates from different lenders to find the best option for your business.

How much does a business loan cost?

The cost of a business loan can vary widely depending on the type of loan, the loan amount, the interest rate, and the repayment terms.

Business loans may include fees such as origination fees, application fees, and closing costs, in addition to interest on the loan amount.

To determine the total cost of a business loan, it’s important to consider the interest rate and any other fees or costs associated with the loan.

How to apply for a business loan

  • Preparation: Before applying for a business loan, it is important to gather all necessary documentation and information, including financial statements, business plans, and tax returns. This will help ensure a smooth and efficient loan application process.
  • Research Lenders: Research different lenders and compare their loan options, interest rates, and terms and conditions to find the best loan for your business. Consider both traditional banks and alternative lenders.
  • Determine Loan Amount: Determine the funding you need and what it will be used for.
  • Complete Loan Application: Complete a loan application and submit it to the lender along with all required documentation and information. This may include financial statements, business plans, and tax returns.
  • Wait for Approval: After submitting your loan application, wait for approval. The approval process can take anywhere from a few days to several weeks, depending on the lender and the complexity of the loan application.
  • Negotiate Terms: Once approved, you may have the opportunity to negotiate loan terms, such as interest rates and repayment periods. Be sure to carefully consider the terms before accepting the loan.
  • Receive Funds: After accepting the loan, the final step is to close the loan and receive the funds. The lender will typically provide instructions for closing the loan and disbursing the funds.

What documents are required for a business loan?

All lenders will have slightly varying requirements, but the normal documents to ask for will include:

  1. Business Plan detailing how you intended to repay the loan
  2. Proof of ID (Directors)
  3. Proof of Business Address
  4. Accurate Cash Flow Forecast
  5. Bank Statements for the Last 2 Years (Obviously, this won’t be possible if you’re a Start-Up)
  6. Profit, Loss and Balance Sheet for the last two years audited by your accountant

What type of security will you need for your business loan?

The classic security for a loan is property, but a wide range of things can be used as loan collateral.

These include equipment, vehicles, inventory, accountants receivable and even old-fashioned cash, although this is a rarity. Both residential and commercial property can be used, as well as agricultural land. Even the open market value of the business itself can be used as security in some instances.

Loan providers will perform their own independent valuations of the collateral you’re offering.

You can still sell the asset you’ve offered as collateral during the running of the loan, but only if you’ve got another form of security to offer in its place.

Personal Guarantees

When the company directors don’t have commercial security to offer, the lenders will ask for a personal guarantee.  These documents allow using a personal asset to secure a commercial loan, commonly a family house.

While personal guarantees are now standard practice and facilitate much-needed finance, they should also be used with caution and always with a full understanding of the potential consequences.

If the business should other default on the loan or become insolvent with the loan outstanding, the personal guarantor’s property will be sold. While the limited company structure commonly protects directors from the fallout of business insolvency, with its clear separation between corporate and personal debt, personal guarantees are specifically designed to surmount these laws and breach the corporate veil.

If a personal guarantee is to be used, we recommend using personal guarantee insurance, which insures against the possibility of default. It can be paid by the company but provides useful protection for the director who is putting their personal property on the line for the company’s good.

Read our full page here on personal guarantee insurance.

Factors to consider when choosing a business loan

  • Interest Rate: The interest rate is one of the most important factors when choosing a business loan. Compare the interest rates of different lenders and consider the total cost of the loan, including both interest and fees, to find the best loan for your business.
  • Repayment Period: Consider the length of the loan repayment period and how it will impact your cash flow and financial situation. A longer repayment period may result in lower monthly payments but a higher overall cost.
  • Loan Purpose: Consider the purpose of the loan and whether the loan is suitable for your needs. Different loans may have specific requirements or restrictions, such as equipment loans, working capital loans, and real estate loans.
  • Loan Type: Consider the type of loan, such as secured or unsecured, and the requirements and benefits of each type. Secured loans may have lower interest rates but require collateral, while unsecured loans may have higher interest rates, but no collateral is required.
  • Lender Reputation: Consider the reputation and experience of the lender and their track record in providing loans to businesses like yours. Look for reviews and feedback from other business owners to gauge the lender’s reliability and customer service.
  • Fees and Charges: Consider the fees and charges associated with the loan, such as application fees, origination fees, and prepayment penalties. Compare the fees and charges of different lenders to find the best loan for your business.
  • Flexibility: Consider the flexibility of the loan and whether the lender allows for changes to loan terms, such as loan amount or repayment period, as the needs of your business change. A flexible loan may benefit your business in the long run.

Risks vs Benefits

Access to CapitalDebt
Improved Cash FlowInterest Rates
Increased Business OpportunitiesCollateral
Tax BenefitsRepayment

Alternatives to Business Loans

  1. Bootstrapping involves using your savings, personal debt, or operating revenues to fund your business. While bootstrapping can limit the speed of your business’s growth, it allows you to retain complete control and avoids the need for repayment and interest charges.
  2. Grants: Some businesses might qualify for government or foundation grants, which do not need to be repaid. However, these can be highly competitive and often require specific usage.
  3. Equity Financing involves selling a portion of your business ownership in exchange for capital. This might come from angel investors, venture capitalists, or via equity crowdfunding platforms. While this method can provide significant funds, it does mean sacrificing a share of your future profits.
  4. Trade Credit: With trade credit, suppliers allow you to purchase goods or services now and pay later, usually within 30 to 90 days. This can help with cash flow, but paying on time is important to maintain a good relationship with your suppliers.
  5. Crowdfunding: Platforms like Kickstarter or Indiegogo allow businesses to raise funds from a large number of individuals, often in exchange for a future product or reward. This can be a good option for consumer-facing businesses with a compelling product or story.
  6. Leasing: Instead of buying equipment outright, consider leasing it. Leasing can free up cash for other


Business loans can be a valuable tool for businesses looking to access capital, improve cash flow, and take advantage of new opportunities. However, it is important to carefully consider the risks and benefits before taking on any type of loan.

If you’re considering a loan, ensure you weigh up factors such as loan amount, repayment terms, interest rates, and the impact on cash flow before making a decision.

Additionally, make sure you understand eligibility criteria, the process of applying for a loan, and the risks involved in case of default.

Businesses can reap the benefits and minimise the risks by taking a careful and informed approach to business loans.

Business Loan FAQs

What are the different types of business loans?

Who is eligible for a business loan?

How do I apply for a business loan?

What factors should I consider when choosing a business loan?

Can I get a business loan with a bad credit score?

What happens if I can’t repay my business loan?

What if I’ve been refused a business loan in the past?

Are business loans hard to get?

Can I repay a business loan early?

How long can I borrow for?