Types of Business Loans: Which One Is Right for You?
No single loan type suits every business. We break down all seven types below.
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The Main Types of Business Loans
Business lending in the UK covers seven distinct product types: term loans, revolving credit facilities, merchant cash advances, government-backed loans, asset finance, invoice finance, and overdrafts. Each has a different repayment structure, rate basis, and eligibility profile.
We compared these products across lenders in our business loans section. The right choice depends on why you need the money, how long you need it, whether your cash flow is predictable, and your current credit profile. The sections below cover each type in detail.
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. The rate is either fixed (same payment every month) or variable (tied to the Bank of England base rate).
Term loans are available unsecured (no asset pledged) or secured (backed by property, equipment, or other assets). Secured term loans offer lower rates — typically 3–8% APR from high-street banks — versus 20–50% APR from unsecured specialist lenders.
Funding Circle offers competitive unsecured term loans from 6.9% APR for established businesses. Barclays, NatWest, and Lloyds offer secured term loans at lower rates, but require strong credit history and 2+ years of trading.
Business Lines of Credit and Revolving Facilities
A revolving credit facility works like a business overdraft with a higher limit — you draw funds when needed, repay them, and draw again without reapplying. Interest accrues only on what you draw, not the full facility amount.
iwoca’s Flexi-Loan is the best-known UK example — you can borrow £1,000 to £1,000,000, repay early with no penalty, and redraw immediately. We found it well-suited to businesses with variable cash flow, seasonal revenue, or irregular client payment cycles.
The trade-off is rate: revolving facilities typically cost more than term loans. iwoca’s representative APR is 49%, significantly higher than term loan alternatives. For businesses that need the flexibility, the higher rate is often worthwhile. For businesses with predictable cash flow, a fixed-rate term loan is cheaper overall.
Merchant Cash Advances
A merchant cash advance (MCA) provides a lump sum repaid as a fixed percentage of daily card sales. If card sales are high, you repay faster; if they are low, repayments slow down. There is no fixed monthly payment and no fixed term.
MCAs use a factor rate (e.g. 1.3) rather than an APR — so a £10,000 advance at factor rate 1.3 means you repay £13,000 in total, regardless of how long it takes. This makes direct APR comparison difficult, but total cost comparisons are straightforward.
Capify specialises in MCAs and considers all credit profiles — including CCJs and adverse credit — focusing instead on monthly card turnover. We found MCAs work well for hospitality, retail, and other card-heavy businesses with variable revenue.
Government-Backed Loans
The British Business Bank administers two main schemes. Start Up Loans offer up to £25,000 at 6% fixed APR for businesses in the early stages — no trading history required, and free business mentoring is included. Applications are assessed individually with no hard credit score threshold.
The Recovery Loan Scheme provides government-guaranteed lending of up to £2,000,000, administered through accredited lenders. The government guarantees 70% of the loan, which reduces lender risk and typically results in better rates or higher eligibility for businesses that would otherwise be declined.
We consider government-backed loans worth exploring before commercial lending — particularly for startups or businesses with thin credit histories. The application process is more involved, but the rate and guarantee terms can be significantly better.
Invoice Finance
Invoice finance lets you borrow against the value of outstanding invoices rather than taking on new debt. Lenders typically advance 85–90% of the invoice value immediately, with the remainder (minus fees) released when your customer pays.
There are two main types: invoice factoring (the lender manages your credit control and chases payment directly — your customers know you are using finance) and invoice discounting (you retain control of credit control — invisible to customers).
Invoice finance is best suited to B2B businesses with reliable commercial customers and 30–90 day payment terms. We found it particularly valuable for businesses with cash flow gaps caused by slow-paying large clients rather than underlying profitability problems.
Which Loan Type Is Right for Your Business?
Use this framework to narrow your options. If you need a lump sum for a specific purchase with predictable repayments: term loan. If you need flexible access to funds with variable repayments: revolving facility or overdraft.
If your revenue comes largely from card sales and your credit is imperfect: merchant cash advance.
If you are early-stage (under 2 years) and need up to £25,000: Start Up Loan. If you have outstanding invoices from slow-paying clients: invoice finance. If you need to finance specific equipment or vehicles: asset finance (not covered on this page — see our equipment finance guide).
We recommend checking eligibility with a soft search at two or three providers before committing to a full application. iwoca and Capify both offer no-impact eligibility checks online.
Business Loan FAQs
What is the difference between a business loan and a business line of credit?
A business loan gives you a fixed lump sum with scheduled repayments. A line of credit gives you a limit you can draw from and repay repeatedly. With a loan, you pay interest on the full amount from day one. With a line of credit, you only pay interest on what you have drawn. Lines of credit suit variable cash flow; loans suit one-off capital needs.
Are merchant cash advances expensive?
They can be. MCAs use factor rates rather than APR, which makes cost comparison difficult. A factor rate of 1.3 on a £10,000 advance means you repay £13,000 in total. The effective APR can be high depending on how quickly your card sales repay it. MCAs work well when flexibility and speed matter more than minimising the total cost of borrowing.
What is the cheapest type of business loan?
Secured term loans from high-street banks typically offer the lowest rates — from around 3–5% APR. The trade-off is eligibility: you need 2+ years of trading, strong credit, and an asset to secure the loan. Government Start Up Loans at 6% fixed are the cheapest accessible option for early-stage businesses. Unsecured loans from specialist lenders cost significantly more.
Can I have more than one type of business loan at the same time?
Yes, in most cases. Many businesses use multiple facilities simultaneously — for example, a term loan for equipment purchase alongside a revolving facility for working capital. Lenders will assess your total borrowing commitments when considering a new application, so existing debt affects your eligibility and rate.
This guide was researched using primary sources including FCA guidance, Bank of England publications, HMRC documentation, and lender and provider primary websites. The content covers business loan types available in the UK. Verified in April 2026.
The information covers general principles applicable to UK businesses and is not financial advice. Rates, terms, and eligibility criteria vary by lender and business circumstances. Verify current terms directly with providers before making decisions.
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