Types of Business Loans: Every UK Option Explained

The Main Types of Business Loan in the UK

Business lenders in the UK offer eight distinct product types: term loans, revolving credit facilities, merchant cash advances, invoice finance, asset finance, government-backed loans, business overdrafts, and bridging loans.

The right product depends on what you need the money for, how long you need it, whether your revenue is predictable, and your current trading age and credit position.

We found that most businesses apply for a term loan by default — but a revolving facility is often a better fit for variable cash flow, and asset finance is frequently overlooked by businesses that could access it. The sections below cover each type on its own terms.

Term Loans

A term loan gives you a lump sum upfront, repaid in fixed monthly instalments over an agreed period — typically 1 to 10 years. You’ll know exactly what you owe each month from day one.

Secured term loans — backed by property, equipment, or business assets — carry the lowest rates: typically 3–8% APR from high-street banks. Unsecured term loans cost more: Funding Circle starts at 6.9% APR; typical ranges elsewhere run 15–50% APR.

That’s the structural problem with term loans: fixed monthly payments and variable revenue don’t mix. We found term loans work best when your revenue is predictable enough to cover the repayment with margin to spare — every month, not just your strong ones.

High-street banks require two years of filed accounts, strong credit, and an existing banking relationship. Funding Circle requires 12 months of trading and a limited company structure. Businesses under 12 months old can’t access commercial term loans.

Revolving Credit Facilities

A revolving credit facility gives you access to a credit limit you can draw from, repay, and draw again without reapplying. You only pay interest on what you have drawn — not the full facility amount.

iwoca’s Flexi-Loan is the best-known UK example — borrow between £1,000 and £1,000,000, repay early with no penalty, and redraw the same day.

We found it particularly useful for businesses managing irregular payment cycles. A client pays late on a large invoice, you draw to cover payroll on the 15th, then repay the day the money lands — no new application, no fixed term.

The trade-off is rate. iwoca’s representative APR is 49%. For businesses that repay within 1–3 months, we found total interest often works out lower than an equivalent term loan. Carry the balance for 12 months or more and a term loan is cheaper.

iwoca has no stated minimum trading period and assesses affordability via Open Banking. We found startups can apply but are limited to a £10,000 credit limit — so you may qualify before you can access a term loan from a bank or Funding Circle.

Merchant Cash Advances

A merchant cash advance (MCA) provides a lump sum repaid as a fixed percentage of your daily card sales. Repayments rise on busy days and slow on quiet ones — there’s no fixed monthly payment and no set term.

MCAs use a factor rate rather than an APR. A £10,000 advance at factor rate 1.3 means you repay £13,000 in total, regardless of how long it takes.

How quickly you repay depends on your card sales volume, which determines the effective annual cost. Fast card sales make MCAs cheaper than they appear. Slow sales do the opposite.

We found Capify requires at least 12 months of trading and £20,000 per month in card payments for an MCA, or £10,000 per month for a standard business loan. It considers all credit profiles, including CCJs.

In practice, MCAs don’t suit businesses that invoice rather than swipe. If most of your revenue arrives as bank transfers, your card volume won’t meet the minimum — a revolving facility or term loan is more appropriate.

Invoice Finance

Invoice finance lets you borrow against the value of outstanding invoices rather than taking on new debt. A lender advances 80–90% of the invoice value when you submit it, with the remainder — minus fees — released when your customer pays.

There are two main types. Invoice factoring: the lender takes over credit control and chases your customers directly — they know you’re using finance. Invoice discounting: you retain control, and the arrangement is invisible to your customers.

Your biggest client pays on 60-day terms. You submit the invoice on the 1st, the lender advances 85% the same day — you stop manually bridging the payment gap at month end. We found this is the situation invoice finance is built for.

Invoice finance suits B2B businesses with reliable commercial customers and 30–90 day payment terms. It isn’t useful if you collect payment at the point of sale, or if your customers are consumers rather than businesses.

Asset Finance

Asset finance funds equipment, vehicles, or machinery without requiring you to pay upfront. The asset itself serves as security, which makes asset finance accessible to newer businesses that can’t offer other collateral.

There are two main structures. Hire purchase: you pay in instalments and own the asset outright at the end. Operating lease: you use the asset for a period and return it — the asset stays off your balance sheet.

When the delivery van breaks down mid-week and you need a replacement before Friday, hire purchase lets you drive it away the same day rather than waiting for a term loan application to clear.

We found asset finance accessible from 6 months of trading at specialist providers — one of the more accessible funding types for early-stage businesses. Lenders typically advance 80–100% of the asset value at 5–15% APR.

Government-Backed Loans

The British Business Bank administers two main schemes. Start Up Loans offer up to £25,000 at 7.5% fixed APR — the only mainstream UK loan product that doesn’t require a personal guarantee.

The Growth Guarantee Scheme (GGS) — successor to the Recovery Loan Scheme — provides government-guaranteed lending of up to £2,000,000 through accredited commercial lenders, extended to March 2030.

The government guarantees 70% of the loan, reducing lender risk and typically resulting in better terms than a straight commercial application for businesses that qualify.

We consider government-backed routes consistently underused. Start Up Loans are assessed individually with no hard credit score threshold — the 7.5% fixed rate and absence of a PG are terms no commercial lender matches.

Business Overdrafts and Bridging Loans

A business overdraft works like a revolving credit facility against your current account — draw when you need funds, repay when they arrive. Banks offer overdrafts to businesses with an existing relationship, 2+ years of trading, and clean credit.

We find overdrafts useful for very short-term gaps — covering a payroll run before a large payment clears. Credit limits are lower than standalone revolving facilities, and banks review them annually, making them unreliable as long-term working capital tools.

Bridging loans are short-term secured loans — typically 1 to 18 months — used when you need funds urgently before a longer-term solution is in place. Common uses include purchasing a property before a sale completes, or funding a time-sensitive acquisition.

Bridging loans carry the highest rates of any loan type: typically 0.5–2% per month. The catch is exit dependency — without a confirmed exit, bridging debt won’t wait. We’d recommend bridging only when you’ve got a confirmed exit within a defined timeframe.

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