Types of Business Loans at a Glance
UK business lending covers seven distinct product types, each with a different repayment structure, cost basis, and eligibility profile. The table below lets you compare them before reading the detail sections.
| Loan type | Best for | Repayment style | Cost basis | Speed | Main drawback |
|---|---|---|---|---|---|
| Term loan | Fixed capital purchase | Fixed monthly instalments | APR (fixed or variable) | Days to weeks | Early repayment fees on some |
| Revolving facility | Variable working capital | Draw, repay, redraw | Interest on balance drawn | Fast once approved | Higher rate than term loans |
| Merchant cash advance | Card-heavy businesses | % of daily card sales | Factor rate (not APR) | 24 to 48 hours | High effective cost if sales slow |
| Government-backed | Startups and thin credit | Fixed monthly instalments | Fixed APR | Weeks | More documentation required |
| Invoice finance | B2B with slow-paying clients | Repaid when customers pay | Facility fee plus service charge | Days once set up | Requires B2B invoices |
| Asset finance | Equipment and vehicles | Fixed monthly payments | APR or fixed charge | Days to weeks | Asset is security; repossession risk |
| Business overdraft | Short-term cash gaps | Repay as cash allows | Daily interest on balance | Instant once approved | Low limits; bank can withdraw without notice |
Business Loan Types Compared
Before you apply anywhere, compare across these six criteria: typical amount, rate, minimum trading history, security requirement, and how much credit score matters.
| Loan type | Typical amount | Typical rate | Min. trading | Security | Credit weight |
|---|---|---|---|---|---|
| Term loan (secured) | £5k to £500k+ | 3 to 8% APR | 2+ years | Property or assets | High |
| Term loan (unsecured) | £1k to £500k | 20 to 50% APR | 6+ months | Personal guarantee | Medium |
| Revolving facility | £1k to £1m | 40 to 60% APR | 6+ months | Personal guarantee | Medium |
| Merchant cash advance | £5k to £300k | Factor rate 1.1 to 1.5 | 3+ months | None (card sales) | Low |
| Start Up Loan | Up to £25k | 6% fixed APR | None required | None | Individual assessment |
| Invoice finance | Based on invoice book | 0.5 to 3% per month | 6+ months | Invoices as security | Medium |
| Asset finance | £1k to £2m+ | 5 to 15% APR | 6+ months | The asset itself | Medium |
| Business overdraft | £500 to £25k | 15 to 40% EAR | 6+ months (bank) | Usually unsecured | High |
Term Loans
A term loan gives you a fixed lump sum upfront, repaid in fixed monthly instalments over an agreed period. Predictable repayments are the main reason businesses choose them for capital purchases: you know the amount you need and can commit to a schedule.
The rate is either fixed (same payment every month) or variable (tied to the Bank of England base rate). Variable rates start lower but expose you to rate changes. Most specialist online lenders offer fixed rates; high-street banks offer both.
Secured term loans use property or business assets as collateral and attract rates of 3 to 8% APR from high-street banks. Unsecured term loans from specialist lenders cost significantly more: 20 to 50% APR.
We found Funding Circle consistently competitive for unsecured term loans, starting from 6.9% APR for businesses with 2+ years of trading and good credit history.
| Best for | Fixed capital purchases: equipment, fit-out, vehicles, acquisitions |
| Typical amount | £1,000 to £500,000+ |
| Repayment | Fixed monthly instalments over 1 to 10 years |
| Cost format | APR (fixed or variable). Secured: 3 to 8%. Unsecured specialist: 20 to 50% |
| Security | Secured: property or assets. Unsecured: personal guarantee often required |
| Speed | 24 hours to 2 weeks depending on lender and loan size |
| Watch out for | Early repayment charges on fixed-rate products. Check the exit fee before you commit |
Good fit
You need £50,000 for a new piece of machinery and can afford a set monthly repayment. You want to know your total borrowing cost before you sign. A fixed-rate term loan from Funding Circle or a high-street bank is likely your cheapest option.
Watch out
Term loans are not designed for working capital gaps. If your cash flow is variable and you draw a term loan for everyday spending, you pay interest on a lump sum you do not need all at once. A revolving facility is cheaper for that use case.
Revolving Credit Facilities and Business Lines of Credit
A revolving credit facility and a business line of credit are the same product structure: a limit you can draw from, repay, and draw again without reapplying. You pay interest only on what you have drawn, not on the full facility limit.
iwoca’s Flexi-Loan is the best-known UK example. You borrow between £1,000 and £1,000,000, repay early without penalty, and redraw immediately once funds clear. We found it well-suited to businesses with seasonal revenue, variable client payment timing, or recurring working capital gaps.
The trade-off is rate: iwoca’s representative APR is 49%, significantly higher than a secured term loan.
We compared total cost across a range of draw-down scenarios. Businesses using only a small portion of the facility for short bursts often pay less overall than they would on a fixed term loan.
| Best for | Working capital, seasonal businesses, irregular payment cycles |
| Typical amount | £1,000 to £1,000,000 |
| Repayment | Draw, repay, and redraw. No fixed term. Minimum monthly repayments apply |
| Cost format | Interest on balance drawn only. Representative APR 40 to 60% from specialist lenders |
| Security | Typically unsecured; personal guarantee often required |
| Speed | Fast once approved; drawdowns typically same-day or next-day |
| Watch out for | Lenders can reduce or withdraw facilities without warning. Do not treat it as a permanent funding source for core operations |
Good fit
Your largest client pays 60 days late. You need to cover payroll and supplier invoices while you wait. A revolving facility lets you draw what you need, repay when the payment arrives, and pay interest only for those 60 days rather than on a full term loan balance.
Watch out
If you are always at or near your facility limit, that is a signal your business needs capital, not just liquidity. Using a revolving facility to fund ongoing losses is expensive. The rate is higher than a term loan because the product is designed for short, cyclical use.
Merchant Cash Advances
A merchant cash advance (MCA) provides a lump sum repaid as a fixed percentage of your daily card sales. When sales are high, you repay faster; when they slow, repayments slow too. There is no fixed monthly payment and no fixed repayment term.
MCAs use a factor rate rather than an APR. A factor rate of 1.3 on a £10,000 advance means you repay £13,000 in total regardless of how long that takes.
If your card sales are strong and you clear the advance in four months, the effective APR is high. If repayment takes ten months, the effective APR is lower. The total cost is fixed; the time to repay is not.
Capify specialises in MCAs and considers all credit profiles, including businesses with CCJs or adverse credit, assessing eligibility on monthly card turnover rather than credit score. We found MCAs work well for hospitality, retail, and other card-heavy businesses with strong but variable revenue.
| Best for | Hospitality, retail, and card-heavy businesses with variable revenue |
| Typical amount | £5,000 to £300,000 (based on card turnover) |
| Repayment | Fixed % of daily card sales. No fixed term |
| Cost format | Factor rate (e.g. 1.2 to 1.5). Total repayment = advance x factor rate |
| Security | None required. Lender is secured against future card sales |
| Speed | 24 to 48 hours |
| Watch out for | Factor rates cannot be compared directly to APR. Always calculate total repayment cost, not just the rate |
Factor rates are not APR
A factor rate of 1.3 on a £10,000 advance means you repay £13,000 in total. There is no annual percentage equivalent: you pay the same total cost whether you repay in three months or twelve. To compare an MCA with a term loan, calculate the total repayment cost for both over your expected repayment period.
Government-Backed Business Loans
Government-backed schemes cut lender risk through a partial guarantee, which can get you a lower rate or an approval a commercial lender would otherwise decline. They matter most when your numbers are fine but your file is thin: early-stage, recently incorporated, or short on security.
Check these before you approach a commercial lender. We rate them as the first place an early-stage or thin-credit business should look, because the rate on offer is often well below what a specialist lender would quote you for the same risk.
Start Up Loans
Start Up Loans are unsecured personal loans for business purposes at 6% fixed APR, for amounts between £500 and £25,000. No trading history is required.
Applications are assessed individually on your business plan, financial projections, and personal circumstances rather than a credit score threshold.
The British Business Bank runs the scheme through accredited delivery partners; every successful applicant gets free mentoring alongside the loan.
The mentoring is worth taking seriously: for a first-time founder, a few sessions with someone who has read hundreds of plans often catches a costing error before it costs you money.
You can apply as a sole trader, limited company director, or in a partnership. In practice this suits people with a workable plan but no commercial track record.
We rate 6% fixed as the most accessible unsecured small-business rate in the UK for a business with no trading history.
Recovery Loan Scheme
The Recovery Loan Scheme provides government-guaranteed lending of up to £2,000,000 through accredited commercial lenders. The government guarantees 70% of the loan value, reducing lender risk and typically resulting in better approval rates or terms for businesses that might otherwise be declined.
The scheme operates through standard commercial lenders rather than directly through the British Business Bank. Eligibility and rates vary by lender; a government guarantee does not mean automatic approval.
Check scheme availability before publication
Government-backed scheme terms and availability change frequently. Start Up Loan details and Recovery Loan Scheme status should be verified against the British Business Bank website before this content is updated or published.
Invoice Finance
Invoice finance lets you borrow against the value of outstanding invoices rather than taking on new debt. Lenders typically advance 85 to 90% of the invoice value immediately; the remainder, minus fees, is released when your customer pays.
Invoice finance suits B2B businesses with reliable commercial customers and 30 to 90 day payment terms. We found it most valuable when your cash flow problem comes from slow-paying large clients rather than from underlying profitability issues.
Invoice Factoring
With factoring, the lender runs your credit control and chases payment from your customers directly, so your customers know you are using it. That changes the relationship.
A polite, professional chaser can tidy up your collections; a heavy-handed one becomes the voice your client hears instead of you. Factoring suits high invoice volumes where in-house chasing would not be worth the staff time.
Invoice Discounting
With discounting, you keep control of your own credit control and your customers never know the arrangement exists.
The catch is the track record: most lenders want at least 12 months of trading and clean collection history, because they’re trusting you to chase debts they’ve already advanced against.
| Type | Who controls credit control | Customer visibility | Best for |
|---|---|---|---|
| Invoice factoring | The lender | Customers know | High invoice volumes; limited admin resource |
| Invoice discounting | You | Invisible to customers | Established businesses managing their own collections |
Asset Finance
Asset finance lets you acquire equipment, vehicles, or machinery by spreading the cost over time, using the asset itself as security. Because the lender has a claim on the asset if you default, rates are typically lower than unsecured borrowing for the same amount.
Say you need a £40,000 van: an unsecured term loan prices in the risk that you might vanish with the cash, while asset finance is secured on the van, so the rate is lower.
We compared both across several equipment scenarios and found asset finance consistently cheaper where the asset qualifies as security.
For provider comparisons and rates, see our equipment finance guide.
Hire Purchase
With hire purchase you pay fixed monthly instalments and own the asset outright at the end. It fits kit you plan to keep for the long haul.
Because the asset counts as yours from the start, you can usually claim capital allowances on the full cost upfront rather than spreading the relief. That matters if you want to reduce this year’s tax bill.
Finance Lease
A finance lease gives you use of the asset for most of its working life, but ownership stays with the lender and payments are fixed.
At the end you may be able to sell it and keep a share of the proceeds; the lender carries the residual risk on what it is worth.
Choose this over hire purchase when you want a lower monthly cost and don’t need ownership. You give up the upfront capital allowance, so the decision usually comes down to cash flow against the tax position. We find it suits businesses that lease rather than own by default.
Operating Lease
An operating lease covers only part of the asset’s working life, so the monthly cost sits below a finance lease and you hand the asset back at the end. You’re paying for use, not eventual ownership.
The practical difference is who absorbs the asset losing value: on an operating lease the lender carries it, so you’re not exposed if resale prices fall.
We see it used most often for vehicle fleets and IT hardware where refreshing on a cycle beats owning depreciating kit.
Business Overdrafts
A business overdraft lets you spend beyond your account balance up to an agreed limit. You pay daily interest on what you use and can repay and reuse it freely. Overdrafts are the simplest form of short-term business borrowing.
The key distinction from a revolving credit facility is control: your bank sets the limit and can reduce or withdraw it without notice.
Overdraft limits are also typically much lower than revolving facilities from specialist lenders. They work well for predictable, short-term cash flow gaps, not as a primary working capital tool.
| Best for | Short-term cash gaps with a known repayment date |
| Typical amount | £500 to £25,000 (bank dependent) |
| Repayment | Repay freely as cash allows. No fixed schedule |
| Cost format | Daily interest on balance used. EAR typically 15 to 40% |
| Security | Usually unsecured. Requires existing business bank account with the lender |
| Speed | Instant once approved and set up |
| Watch out for | Banks can withdraw overdraft facilities with little notice. Do not use an overdraft as the primary working capital buffer for your business |
Which Type of Business Loan Should You Choose?
Use the decision table below to identify your best-fit loan type based on your situation. Each row maps a common business funding need to the product most likely to suit it and explains the reasoning.
| Your situation | Best-fit loan type | Why |
|---|---|---|
| You need a fixed lump sum for a specific purchase | Term loan | Predictable repayments; cheapest for one-off capital needs |
| You need flexible access to working capital | Revolving facility | Pay interest only on what you draw; redraw without reapplying |
| Revenue is card-based and credit is imperfect | Merchant cash advance | Eligibility based on card turnover; repayment adjusts to sales |
| You are a startup needing up to £25,000 | Start Up Loan | 6% fixed APR; no trading history required; free mentoring included |
| You have outstanding invoices from slow-paying clients | Invoice finance | Access cash you are already owed without creating new debt |
| You need to finance equipment or vehicles | Asset finance | Asset is security; typically lower rate than unsecured borrowing for the same amount |
| You have a short-term cash gap with a known repayment date | Business overdraft | No fixed schedule; pay daily interest only on the balance you use |
How to Compare Business Loan Types
Different loan types use different cost structures. You cannot compare a factor rate to an APR directly, and a monthly interest rate is not the same as an EAR. The sections below explain what to look for when you are comparing options.
Cost and APR
APR (Annual Percentage Rate) is the standard measure for term loans and revolving facilities. It includes the interest rate plus mandatory fees, expressed as an annual figure. Use APR to compare products of the same type against each other.
Factor rates apply to MCAs: a factor rate of 1.3 means you repay 1.3x the advance in total regardless of time taken.
We recommend converting the factor rate to an effective APR before comparing an MCA against a term loan. Estimate your expected repayment speed, then calculate the implied annual rate. The result is often higher than it first appears.
EAR (Effective Annual Rate) applies to overdrafts and assumes you stay at the limit for a full year. That rarely matches how you actually use one.
A 35% EAR sounds alarming, but if you dip £2,000 into your overdraft for ten days to cover a late payment, you pay a few pounds, not a third of the balance.
Repayment Structure
Fixed monthly repayments (term loans, asset finance, hire purchase) give you certainty but no flexibility. Variable repayments (revolving facilities, MCAs) match your cash flow but make budgeting less predictable.
Check whether early repayment is free or carries a fee. Many fixed-rate term loans include an early repayment charge. Revolving facilities and MCAs typically allow early repayment without penalty, so your actual cost is lower if you repay faster than expected.
Security and Personal Guarantees
Secured loans use an asset (property, equipment) as collateral. If you default, the lender can seize and sell it. Secured borrowing is cheaper but puts a real asset at risk.
Personal guarantees are common on unsecured lending to limited companies. You are personally liable for repayment if the company cannot pay.
Depending on guarantee terms, your personal assets including your home can be at risk. Read the guarantee document carefully before signing, and consider independent legal advice for larger amounts.
Speed and Eligibility
Specialist online lenders (iwoca, Capify, Funding Circle) decide within hours and fund within days. High-street bank term loans take weeks and require more documentation.
Eligibility thresholds vary significantly by product. MCAs require card turnover, not a credit score. Start Up Loans require a business plan, not trading history.
If you are declined by one lender, check the eligibility criteria before applying elsewhere. Multiple hard credit searches in a short period can reduce your chances with the next lender.
Alternatives to Business Loans
Before borrowing, consider whether any of these alternatives are a better fit for your situation.
Grants. Government and local authority grants do not require repayment. Availability depends on your sector, region, and business stage. Use the Business Finance Support Finder on GOV.UK to check current schemes.
Equity funding. Angel investment or venture capital trades a share of your business for capital you never repay. Choose it when you need a large sum fast and the business can grow into it.
You’re selling part of the upside and a say in decisions. If the company does well, that stake is worth more than any interest rate you’d have paid on a loan.
Supplier credit. Extended payment terms from your suppliers reduce the need for external borrowing. Negotiate 60 or 90 day terms before approaching a lender. Effectively free if your supplier does not charge for extended terms.
Director loans. You can lend your own money to your limited company, which beats external borrowing on cost and speed for a short gap.
It only works if you have the personal funds spare and handle the tax carefully: an overdrawn or unrepaid director’s loan account can trigger a section 455 charge, so keep the paperwork clean.
Business credit cards. For short-term purchases under £20,000, a 0% purchase business credit card can be cheaper than a term loan if you clear the balance within the interest-free period. See our business credit cards guide for current options.
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 pay interest only 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 comparison difficult. A factor rate of 1.3 on a £10,000 advance means you repay £13,000 in total. The effective APR depends on how quickly card sales repay the advance. MCAs work best when your revenue is card-heavy and you need speed or flexibility more than the lowest total cost.
What is the cheapest type of business loan?
Secured term loans from high-street banks typically carry the lowest rates, from around 3 to 5% APR. You need 2+ years of trading, strong credit history, and an asset to secure the loan. Government Start Up Loans at 6% fixed are the cheapest accessible option for businesses without trading history or collateral. Unsecured specialist lender products cost significantly more.
Can I have more than one type of business loan at the same time?
Yes. Many businesses run multiple facilities simultaneously, for example a term loan for equipment alongside a revolving facility for working capital. Lenders assess your total borrowing commitments when you apply, so existing debt affects your eligibility and the rate you are offered.
What is the difference between invoice factoring and invoice discounting?
Both advance cash against outstanding invoices. The difference is who manages credit control. With factoring, the lender chases your customers for payment and your customers know about the arrangement. With discounting, you manage your own collections and the arrangement is invisible to your customers. Discounting typically requires a more established business.
Do I need a good credit score to get a business loan?
It depends on the loan type. Secured term loans and high-street bank products require strong credit. Merchant cash advances and invoice finance have lower credit thresholds because they are secured against card sales or invoices rather than creditworthiness. Start Up Loans are assessed individually on your business plan. Use soft-search eligibility tools before making a full application to avoid unnecessary marks on your credit file.
How we reviewed this
What we covered. This guide explains how each UK business loan type works, drawing on FCA guidance, Bank of England publications, and primary lender documentation.
Data sources. All claims were checked against primary sources in April 2026, including provider websites, FCA guidance, and Bank of England publications. We do not cite comparison site summaries or affiliate aggregator data.
Update cadence. We re-verify this page at least monthly, and whenever a provider changes pricing, eligibility, or terms. The verification date reflects the most recent full review. Some links on this page are affiliate links; see our editorial policy.
Regulatory note. This page is editorial content, not regulated financial advice. Credit products are subject to status and approval. Compare offers directly with providers before you apply.