For many small businesses across the UK, access to external finance is essential for starting up, managing cash flow or achieving growth ambitions. The term “small business loans” encompasses a diverse array of financial products, each designed with different structures, suitability and purposes to cater to the varied needs and credit profiles of enterprises from sole traders to those on the cusp of becoming larger corporations.
Understanding Small Business Loans
A small business loan is essentially a sum of money provided to a commercial organisation which the borrower agrees to repay, along with interest, over a predetermined period. Unlike personal loans these funds are intended exclusively for business use. The landscape of small business loans is vast, reflecting the wide range of requirements that businesses might have.
Types of Small Business Loans
The UK market offers numerous types of loans tailored for small businesses, often categorised by whether they require collateral and their intended use.
Secured vs. Unsecured Loans
- Secured Business Loans: These loans require the business to use an asset as collateral. This could be commercial property, vehicles, machinery or even outstanding invoices. The security reduces the risk for the lender often resulting in lower interest rates and potentially higher borrowing amounts. However defaulting on the loan is a significant consideration for the borrower, as the asset the loan is secured against will be lost.
- Unsecured Business Loans: These do not require assets as security. Instead, the lending decision is largely based on the business’s creditworthiness, trading history and projected cash flow. As the risk to the lender is higher, unsecured loans typically come with higher interest rates and may require a personal guarantee from the business owners or directors.
Specialist Loan Variants
Beyond the secured/unsecured distinction, several specialised loan types cater to specific small business needs:
- Standard Term Loans: A lump sum is provided upfront, repaid in fixed instalments over a set period, commonly from one to ten years. This is a traditional form of lending suitable for equipment purchases, business expansion or significant working capital needs.
- Startup Loans: Government-backed personal loans designed specifically for individuals looking to start or grow a new UK-based business that has been trading for less than 36 months. They come with a fixed interest rate and often include free mentoring support, making them a popular choice for aspiring entrepreneurs. Other providers may offer start up loans that are not part of the government scheme which might be secured or unsecured.
- Merchant Cash Advance: Not a traditional loan, but an advance based on a business’s future credit and debit card sales. Repayments are a pre-agreed percentage of daily card transactions, flexing with sales volume. This is for businesses that use card turnover like retail shops, restaurants, cafes, pubs or vape shops as it offers flexible repayments aligned with income.
- Invoice Finance: Also known as invoice factoring or discounting, this allows businesses to unlock cash tied up in unpaid customer invoices. A lender provides an upfront percentage of the invoice value, improving immediate cash flow, particularly for businesses with long payment terms.
- Asset Finance: This facilitates the acquisition of essential business assets like vehicles (e.g., company cars, vans for delivery, specialist taxis), machinery or technology. Options include Hire Purchase (where the business eventually owns the asset) and Leasing (long-term rental without ownership). It allows businesses to spread the cost of significant investments over time.
- Business Overdrafts: Similar to a personal overdraft, this provides a flexible line of credit linked to the business bank account and used for managing short-term cash flow gaps. Interest is typically charged only on the amount utilised.
- Bridging Loans: Short-term, usually secured loans, designed to “bridge” a temporary funding gap, most often used in property transactions or when awaiting longer-term finance.
- Government-Backed Schemes: Beyond Start Up Loans, schemes like the Growth Guarantee Scheme (GGS) provide a government guarantee to lenders, encouraging them to lend to viable businesses that might otherwise face challenges in accessing finance or better rates.
Suitability and Circumstances
The most suitable small business loan depends heavily on the individual business’s specific situation:
- Startup Phase: Start Up Loans are often the most direct route, and also overdrafts.
- Rapid Growth: Unsecured loans or flexible credit facilities can provide quick access to working capital or funds for immediate opportunities.
- Equipment or Vehicle Purchase: Asset finance is specifically designed for this, preserving working capital.
- Cash Flow Management: Overdrafts, revolving credit facilities, invoice finance or merchant cash advances work for smoothing out cash flow inconsistencies, especially for businesses with seasonal income or fluctuating card sales.
- Property Acquisition or Development: Secured loans, including commercial mortgages or bridging loans are necessary for these significant investments.
- Less Than Perfect Credit: While challenging, specialist lenders offer bad credit business loans often secured or with higher interest rates, focusing more on current trading performance than past credit issues.
Before applying for any small business loan, it is prudent to:
- Assess Needs: Clearly define the purpose and exact amount of funding required.
- Evaluate Repayment Capacity: Objectively determine if the business can comfortably afford the repayments based on projected cash flow.
- Understand Credit Profile: Review both business and personal credit scores, as these influence eligibility and interest rates.
- Compare Options: Do not limit the search to traditional banks; explore online lenders, specialist finance providers and government-backed schemes.
- Prepare Documentation: Have a comprehensive business plan, financial statements, and forecasts ready to support an application.
Choosing the right small business loan is a strategic decision that can significantly impact a business’s trajectory. By thoroughly understanding the available types and their suitability, business owners can make informed choices to fuel their ventures.
Small Business Loans FAQs
How long does it typically take to get a small business loan?
The time it takes to receive funds can vary. Traditional bank loans might have longer processing times, potentially weeks. However, many online and alternative lenders can offer much faster approval with funds often disbursed within 24-48 hours for certain loan types, especially for smaller, less complex applications.
Do I need collateral to get a small business loan?
Not always. Small business loans come in two main forms: secured and unsecured. Secured loans require an asset (like property or equipment) as collateral. Unsecured loans do not require collateral, but might require a personal guarantee from the business owner. Your business’s credit history and financial stability will influence which options are available.
Can a brand new small business get a loan?
Yes, new small businesses can get loans, although options will be more limited than for established businesses. Government-backed Start Up Loans are specifically designed for businesses trading for less than 36 months and consider the individual’s credit history and business plan. Some alternative lenders also focus on the viability of the business idea and cash flow projections rather than a long trading history.
What information will lenders typically ask for when I apply for a small business loan?
Lenders will generally require information to assess your business’s financial health and ability to repay. This often includes a detailed business plan, recent bank statements, profit and loss statements, balance sheets, cash flow forecasts and identification.
5. What happens if my small business struggles to make loan repayments?
If your business faces difficulties in making loan repayments, it’s advisable to contact your lender as soon as possible. Missing payments can negatively impact your business’s credit score and may lead to additional fees or penalties. Some lenders may be willing to discuss options like a temporary repayment holiday or adjusting the payment schedule, but this is at their discretion and often comes with accrued interest. The important part is to talk to the lender before you default on a payment.