As with any business, limited companies need access to capital to fuel growth. A recent survey by the British Business Bank shows that 38% of smaller businesses were using some form of finance.
But securing a business loan for a limited company is not always straightforward, and several factors can impact your eligibility.
In this article, I will discuss the types of loans available for limited companies, the eligibility and prerequisites, and provide tips on improving your chances of approval.
My goal is to help you find the capital you need to grow your business and create long-term, sustainable success.
Get a Simple Business Loan Quote
- Access to a diverse range of lenders
- Bad credit loans considered
- Competitive rates
- Borrow Between £10k and £2m
- Rates Monitored & Updated Daily
- Exclusive Products and Rates as Low as 1.8%
- Pros & Cons of Limited Company Business Loans
- Eligibility Requirements
- Credit Requirements
- Interest rates and Repayment Terms
- How do limited company loans work?
- The application process for a business loan
- Are there tax implications for a limited company business loan?
- Using Limited Company Business Loan Funds Effectively
- Managing a Limited Company Business Loan
Pros & Cons of Limited Company Business Loans
- Access to lump sum capital
- Flexible uses for a range of general business purposes
- Potentially faster than equity financing
- No loss of control or ownership
- Tax deductible interest
- Establishes a positive credit profile.
- Predictable monthly payment
- Debt burden
- Risk of default
- Collateral required
- High-interest rates
- fixed repayment schedules
- Personal guarantee
- Existing loans could hamper future financing.
Eligibility Requirements for Limited Company Business Loans
Here are some of the typical eligibility requirements for limited companies seeking business loans in the UK:
|Business Loan Criteria||Description|
|Age of Business||Lenders prefer businesses with a proven track record, usually requiring at least two years of operation. There are options available for newer businesses.|
|Credit Score||Both personal and business credit scores may be assessed. Higher credit scores generally improve your chances of approval and result in better loan terms.|
|Annual Revenue||Lenders often require a minimum annual revenue, which varies depending on the loan type and lender. Consistent and growing revenue is preferred.|
|Debt-to-Income Ratio||Lenders evaluate the borrower’s total monthly debt payments divided by their gross monthly income. A lower ratio indicates a better financial position.|
|Collateral||Some loans require collateral, such as real estate, equipment, or inventory. Unsecured loans do not require collateral but may have higher interest rates.|
|Business Plan||Lenders may request a detailed business plan outlining the purpose of the loan, company operations, management, financial projections, and marketing strategy.|
|Industry||Lenders may consider some industries higher risk, affecting loan eligibility and terms.|
|Legal and Financial Documents||Businesses must provide legal and financial documents, such as tax returns, balance sheets, income statements, and business licenses, to verify their status.|
Types of Limited Company Business Loans Available
Here are some of the main types of business loans available for limited companies in the UK:
|Type of Loan||Collateral||Interest Rate||Repayment Term||Eligibility Criteria|
|Secured Business Loan||Property, equipment, inventory||Typically lower than unsecured loans||Typically 2-10 years||Collateral such as property, inventory, or equipment|
|Unsecured Business Loan||None||Typically higher than secured loans||Typically 1-5 years||Good credit history, trading history of at least 12 months|
|Short Term Business Loan||None||Typically higher than long-term loans||Typically less than 1 year||Good credit history, regular and predictable cash flow|
|Equipment Financing||Equipment||Typically lower than unsecured loans||Typically 3-5 years||Good credit history, need to purchase equipment|
|Invoice Financing||Unpaid invoices||Typically lower than unsecured loans||Typically 30-120 days||Good credit history, regular and predictable cash flow|
A secured loan is a loan that requires collateral, such as property, inventory or equipment. If you default on the loan, the lender can seize the collateral to recover their funds. Secured loans typically have lower interest rates and longer repayment terms than unsecured loans.
An unsecured loan does not require collateral but may require a personal guarantee or a lien on business assets. Unsecured loans typically have higher interest rates and shorter repayment terms.
Short-Term Business Loans
Short-term business loans are designed for businesses that need quick access to cash. These loans typically have a repayment term of six to 18 months and may have higher interest rates than other types of loans. A bridging loan would fall into this category.
Equipment financing is a loan to purchase or lease equipment. The equipment itself may serve as collateral for the loan.
Invoice financing is a loan that uses your outstanding invoices as collateral.
Applying for a First-Time Limited Company Business Loan
Here are some tips to help improve your chances of getting approved for a first-time business loan:
- Polish your Business Plan – A detailed and well-researched business plan can help you demonstrate to lenders that you have a solid understanding of your business and how it will generate revenue. Make sure to include financial projections, market research, and a detailed business model description.
- Work on Your Credit Score – Pay your bills on time, keep your credit card balances low, and dispute any errors on your credit report. (» MORE Read our full article on How to Check Your Business Credit Score)
- Research Government-Backed Loans – Government-backed loans, such as Small Business Administration (SBA) loans, can be a good option for first-time business owners. The government partially guarantees these loans and have more lenient eligibility requirements than traditional loans.
- Hunt for Lenders that Cater to First-Time Business Owners – Some lenders specialize in working with first-time business owners and may have more flexible eligibility requirements or loan terms.
- Consider Alternative Financing Options – Alternative financing options, such as crowdfunding, peer-to-peer lending, or micro-loans, can be a good option for businesses that have difficulty getting approved for traditional loans.
- Prepare a Strong Loan Application – Your loan application should be thorough, professional and well-organized. Be sure to include all necessary financial documents, such as tax returns, bank statements and financial statements, and be prepared to answer questions about your business.
Remember, getting approved for a first-time business loan can be challenging, but with the right preparation, research and persistence, you can increase your chances.
When negotiating the terms of a business loan, be prepared to walk away if you are not happy with the terms.
Credit Requirements for Limited Company Loans
Credit requirements play a crucial role in determining the eligibility and terms of limited company loans. Lenders evaluate creditworthiness based on both personal and business credit scores.
Here are the main credit factors that lenders consider when evaluating a limited company loan application:
- Personal Credit Score: Lenders may assess the credit scores of the company’s directors and majority shareholders. A higher personal credit score indicates responsible borrowing behaviour and improves the chances of loan approval. Maintaining a good personal credit score by paying bills on time, keeping credit utilization low, and regularly monitoring credit reports can positively impact loan eligibility.
- Business Credit Score: A limited company’s business credit score is another critical factor in the loan evaluation process. Business credit scores are determined by factors such as credit utilization, payment history with suppliers, and public records like bankruptcies or tax liens. Building a strong business credit score involves paying suppliers on time, maintaining a low credit utilization rate, and keeping accurate financial records.
- Debt-to-Income Ratio: Lenders will examine the limited company’s debt-to-income ratio, which compares the business’s total monthly debt payments to its gross monthly income. A lower ratio signifies a healthier financial position.
- Debt-to-Equity Ratio: This ratio measures the company’s financial leverage by comparing its total liabilities to shareholders’ equity. A lower debt-to-equity ratio indicates a stronger financial position, which can positively impact loan eligibility.
- Credit History: A history of timely payments, low credit utilization, and responsible borrowing behaviour reflects the company’s ability to repay the loan positively.
- Collateral: Some limited company loans may require collateral, such as property, equipment, or inventory, to secure the loan. Offering collateral can improve the chances of loan approval, especially if the company’s credit scores are not optimal.
Do I need good credit to apply for a limited company loan?
Having good credit can improve your chances of getting approved, but it’s not the only factor that lenders consider. Most lenders will expect a minimum credit score of between 640 to 700 to consider your application.
Lenders will evaluate various factors, such as your company’s financial history, cash flow, assets, liabilities, and credit score.
Lenders may also check your personal credit score and financial history to assess your financial responsibility and risk level. If you have poor credit, you may still be eligible, but you may have to pay higher interest rates or provide additional collateral.
Why is it easier for a limited company to get a business loan?
Limited companies may find it easier to get a loan than other types of businesses because they are considered separate legal entities from their owners.
This means that the company’s liability is limited to the number of its assets, and the owners are not personally responsible for the company’s debts. This limited liability feature can make lenders feel more secure about providing loans to limited companies.
Furthermore, limited companies typically have more established financial records and business plans than sole proprietors or partnerships, which can make it easier for lenders to evaluate their creditworthiness and risk. Limited companies must file annual financial statements and tax returns, which provide lenders with a clear understanding of the company’s financial health, and they also have to register with government agencies, which adds to their credibility.
Finally, limited companies may have more collateral available to secure a loan. For example, they may have property or equipment that they can use as collateral, which can lower the lender’s risk.
What are the interest rates for a typical UK business loan to a limited company?
Interest rates for UK business loans can range from 2% to 30%, depending on the lender and the borrower’s creditworthiness.
|Loan Type||Typical Interest Rates|
|Traditional Bank Loans||2% to 13%|
|Online Lender Loans||7% to 30%|
|Invoice Financing||13% to 60%|
|UK Bank Average for SME Loans||5.8% (as of December 2022)|
What are the typical repayment terms for limited company business loans?
Repayment terms for limited company loans can vary depending on factors such as the loan type, the lender, and the borrower’s creditworthiness. Here’s a general overview of typical repayment terms for different types of limited company loans:
|Loan Type||Typical Repayment Terms|
|Traditional Bank Loans||1 to 10 years|
|Online Lender Loans||3 months to 5 years|
|Invoice Financing||Based on invoice due dates|
|Asset-Backed Loans||1 to 5 years|
|Short-Term Loans||3 months to 2 years|
|Long-Term Loans||3 to 10+ years|
|Merchant Cash Advance||3 months to 2 years (variable)|
|Government-backed Startup Loans||1 to 5 years|
Payment Frequency for limited company loans
Payment frequency for limited company loans depends on the loan type and the lender’s terms. Here’s an overview of common payment frequencies for different types of limited company loans:
|Loan Type||Typical Payment Frequency|
|Traditional Bank Loans||Monthly|
|Online Lender Loans||Weekly, Biweekly, or Monthly|
|Invoice Financing||Upon invoice payment|
|Short-Term Loans||Weekly, Biweekly, or Monthly|
|Merchant Cash Advance||Daily or Weekly|
|Government-backed Startup Loans||Monthly|
Understanding the payment frequency outlined in your loan agreement is essential, as it will directly impact your company’s cash flow management. Make sure to choose a loan with a repayment schedule that aligns with your business’s financial capabilities.
Early Repayment Penalties for limited company loans
Some lenders may charge a penalty fee for early repayment of the loan. You’ll need to check this carefully.
Early repayment penalties, also known as prepayment penalties, are fees charged by some lenders if a borrower pays off a loan before the end of the agreed-upon term. These penalties can vary by lender and loan type. Here’s a general overview:
|Loan Type||Early Repayment Penalties|
|Traditional Bank Loans||Varies by lender; some may charge|
|Online Lender Loans||Varies by lender; some may charge|
|Invoice Financing||Usually no penalty|
|Asset-Backed Loans||Varies by lender; some may charge|
|Short-Term Loans||Varies by lender; some may charge|
|Long-Term Loans||Varies by lender; some may charge|
|Merchant Cash Advance||Usually no penalty|
|Government-backed Startup Loans||No penalty|
What are the fees for a limited company business loan?
Here are some common fees associated with business loans in the UK. You’ll need to check carefully with each provider before signing on the dotted line because some lenders are not 100% transparent.
- Origination Fee: An origination fee is a one-time fee charged by the lender for processing the loan. This fee may be a percentage of the loan amount or a flat fee. Origination fees can range from 1% to 5% of the loan amount.
- Processing Fee: A processing fee is a fee charged by the lender to cover administrative costs associated with the loan, such as credit checks, document processing, and underwriting. This fee can vary depending on the lender and the loan amount.
- Late Payment Fee: A late payment fee is charged if the borrower fails to make a loan payment on time. This fee may be a percentage of the payment amount or a flat fee.
- Prepayment Fee: Some lenders may charge a fee if the borrower pays off the loan before the end of the loan term. This fee is designed to compensate the lender for the lost interest on the loan.
- Annual Fee: Some lenders may charge an annual fee for the loan, which is typically a percentage of the loan amount. This fee may cover the costs associated with managing the loan over the course of the year.
Government Loans UK – Start Up Loans – British Business Bank
Your Local Chamber of Commerce – Find a Chamber
How do limited company loans work?
Here’s how limited company loans work:
- Application process: The company applies for a loan by submitting an application to a lender, such as a bank, online lender, or alternative financing provider. The application typically requires information about the company, its financial performance, and the purpose of the loan.
- Credit assessment: The lender assesses the creditworthiness of the limited company and its directors. This involves reviewing the company’s credit history, financial statements, and other relevant information. The lender may also evaluate the personal credit history of the company directors.
- Loan approval: If the lender is satisfied with the credit assessment and the company meets all eligibility criteria, they may approve the loan application. The terms of the loan, including the interest rate, repayment schedule, and any additional fees or charges, are agreed upon by both parties.
- Disbursement of funds: Once the loan agreement is signed, the lender disburses the funds to the limited company. The funds can be used for the agreed-upon business purposes outlined in the application.
- Loan repayments: The limited company is responsible for repaying the loan according to the agreed-upon terms. Repayments are typically made in regular instalments, such as monthly or quarterly, and include both the principal and interest.
- Collateral and personal guarantees: Depending on the type of loan and the lender’s requirements, the limited company may need to provide collateral (such as property or equipment) as security for the loan. In some cases, directors may be asked to provide personal guarantees, making them personally liable for the loan repayment if the company defaults.
Loan Alternatives for Limited Companies with No Money
Here are some loan options for limited companies with no money:
- Crowdfunding – Crowdfunding is a fundraising method involving raising small amounts of money from many people. Many crowdfunding platforms, such as Kickstarter, Indiegogo, and GoFundMe, can help you reach a wider audience and raise funds for your business.
- Angel Investors – Angel investors are high-net-worth individuals who invest in early-stage businesses in exchange for equity or ownership. To attract angel investors, you need to have a solid business plan and pitch and a clear vision for your business.
- Business Grants – Business grants are funds from the UK government or charities to support specific industries or causes. Various grants are available for limited companies that support innovation, research and development, and sustainability.
- Microloans are small loans typically offered by non-profits, credit unions, or community development financial institutions (CDFIs). These loans can be used for working capital, inventory, or equipment and may have more flexible eligibility requirements than traditional loans.
- Invoice Factoring – Invoice financing is a loan that uses your outstanding invoices as collateral. This type of loan can help improve your cash flow by providing you with cash upfront for your invoices.
The application process for a business loan
When applying for financing, limited company directors should be prepared for the following general application process:
- Assess your capital requirements, intended use of funds, and ability to repay the loan. This shapes the loan features you’ll need.
- Identify lenders that offer product features matching your needs. Compare factors like rates, terms, fees, collateral requirements and eligibility criteria.
- Complete the lender’s application providing details on your company, industry, purpose of loan, amount required, repayment ability, and collateral offered.
- Lenders will require financial statements, business plans, licenses, ownership information, tax returns, and bank statements to corroborate the application.
- The lender analyzes your company’s creditworthiness, collateral, cash flow, industry risk, and other factors to make a loan decision.
- Be prepared to answer additional questions or submit revised documentation if required during the lender’s review.
- If approved, the lender provides the loan offer terms for review. Negotiate for better terms if possible before accepting the offer.
- Work with your legal counsel to finalize the loan agreement and supporting documents to the satisfaction of both parties.
- Disburse Funds
Are there tax implications for a limited company business loan?
I always advise limited company directors to be aware of how business loans can impact taxes owed.
Here are some key tax considerations:
- Interest Expense Deduction – Interest paid on business loans is generally tax deductible as a business expense. This deduction lowers taxable profits. However, there may be limits imposed if loans are deemed excessive.
- No Tax Deduction for Principal Repayments – Repaying the principal loan amount does not generate a tax deduction for the limited company. Only the interest portion provides savings.
- Potential VAT Impacts – If loan funds are used to purchase assets or services subject to VAT, the limited company must account for VAT properly. Professional advice may be warranted.
- Increased Profitability – If the loan funds profitable expansions or improvements, the company may move into higher tax brackets in future years as profits rise.
- Use of Losses – Interest deductions may help offset or shelter taxable income in loss-making early years, providing temporary tax benefit.
- Tax Compliance – Additional administration and paperwork is required to properly track interest deductions and use of loan funds for taxes.
- Change in Company Value – Taking on significant debt could reduce the valuation of the company for future capital gains tax purposes if shares are ever sold.
I recommend you consult an accountant to stay abreast of both your short-term and long-term tax implications.
Using Limited Company Business Loan Funds Effectively
When you take out a business loan, it’s important to use the funds strategically:
- Have a detailed business plan mapping out how the injection of capital will be deployed before drawing down the loan. Track spending against this.
- Focus investment on activities that will boost profitability and facilitate repayment, such as new equipment, expanded facilities, marketing campaigns, or additional staff.
- Be conservative with financial forecasts. Do not overly rely on best-case scenarios for projected growth and returns.
- Pay close attention to working capital management. Only allocate what is affordable for loan repayments.
- Avoid frivolous expenditures that do not clearly further your core business goals. Luxury purchases can drain cash reserves.
- Consider using a portion of funds to improve cash flow, such as prepaying expenses or invoices to negotiate discounts.
- Invest surplus funds wisely to generate returns, for example high interest savings accounts or safe securities. Do not leave excess capital idle.
- Reinvest profits from loan-funded activities into growing your business. This builds momentum for long-term gains.
Planning diligently prior to securing financing and closely tracking the deployment of funds against projections post-loan will optimize the effective use of capital.
Managing a Limited Company Business Loan
Once you’ve secured a business loan, it’s important to manage the financing responsibly:
- Set up repayment reminders and allocate funds to cover instalment costs before they are due. Avoid missed or late repayments, which incur penalties.
- Closely monitor your cash flow to ensure sufficient working capital remains after loan repayments. Keep projections updated.
- Only use the loan funds for agreed business purposes, not personal expenses. Keep records to show how the money is spent.
- Provide ongoing financial information to the lender as required. This may include updated accounts, management reports, and bank statements.
- Maintain a good relationship with the lender. Communicate promptly if difficulties arise in order to renegotiate terms.
- Review interest rates and repayment terms as you approach the end of the loan period. Consider options to refinance on better terms.
- Calculate the return on investment from activities enabled by the loan. Track performance to assess if financial goals are met.
- Invest surplus funds from the loan wisely to generate additional income. Do not leave large sums idle in low interest accounts.
Following best practices around governance, communication, record keeping, and performance management will help you maximize the benefits of your limited company loan.
Limited Company Loan FAQs
How long does it take to receive funds after applying for a business loan?
The response time is highly variable. Tide Business Loans claims to be the fastest on the market right now: simply connect your existing bank account to its APP and get approval within a matter of minutes
Do ltd company loans require personal guarantees?
Lenders often request personal guarantees when a limited company cannot provide sufficient collateral or has a limited credit history, making it difficult for the lender to assess the risk associated with the loan.
Can I apply for a business loan with poor credit scores?
Yes, you may still be eligible for a business loan with a poor credit score, but the loan terms may not be as favourable.
What happens if I can’t repay my business loan on time?
If you cannot repay your business loan on time, you may be charged late payment fees or other penalties, and your credit score may be negatively impacted. If the loan is secured, the lender may also be able to seize the collateral you put up to secure the loan. It’s essential to communicate with your lender if you anticipate difficulty making loan payments and explore options for repayment.