In this guide
Whether it be an established enterprise or a start up, a business loan can be the perfect solution to expand your company. We explain how to obtain a business loan, and how it works.
In the last few months of 2023, businesses started showing an appetite for lending once again. According to UK Finance, an industry trade body, small to medium businesses took out £3.5 billion in lending – making it the first quarter where this figure hasn’t declined since 2022.
“There were promising signs that new finance may be turning a corner in the final quarter of 2023,” said David Raw, managing director of Commercial Finance at UK Finance.
“Approvals for new loans and overdrafts increased and the rise was broad-based across all sectors. This could be a sign that confidence is gradually improving,” he further explained.
If you believe it’s the right time to boost your company’s capital, then a business loan could be a great option. Below we explain:
- What is a business loan
- How to acquire a business loan
- How do business loans work?
- What are the best rates for business loans
- How to get a business loan
Read more: The best business savings accounts
What is a business loan?
A business loan is a form of commercial financing which aims to help companies expand. A lender will typically provide a cash injection and you’ll need to pay this back in bitesize monthly instalments along with the interest.
Business loans also come in two forms, secured and unsecured lending:
- Secured lending – This requires an asset, such as property, to be used as collateral. So, in the event that you won’t be able to make your repayments your lender could repossess this asset to recoup some or all of their losses
- Unsecured lending – Under this lending you don’t use any collateral for your loan. Since this involves more risk, lenders typically charge higher interest rates
Get Experian business credit reports with Capitalise
Sign up with Capitalise and view your business’s credit rating through Experian. You’ll also receive personalised lending offers and a detailed analysis of what’s impacting your score.
How to get a loan for your business
Once you’ve decided on a business loan the next step is to check your eligibility for your funding. A great starting point is to check your business credit score, and if you’re unsure how we’ve listed the steps you need to take in our guide. In addition, we’ve also laid out some tips for improving your score.
You could also check your Experian score with our preferred partner Capitalise*. The advantage of using their services is that you’ll also receive personalised lending offers and a full breakdown of the individual factors affecting your business credit score.
What information do I need to apply?
Once you’re confident that you qualify for a business loan, you’ll need to ready your application. When applying, you may need the following:
- Business bank statements – This can provide insight into how you manage your finances
- Evidence of other financing – If you’ve kept up-to-date with your repayment plan then this can enhance your application
- A business plan –A well-thought business planproves to your lender that you’re going to use the money responsibly
- Proof of tax returns – This will help your lender verify the source of your earnings
- Details of other assets to be used as collateral – If you’re looking at applying for a secured loan, you’ll need to provide details of the asset you’ll be using as collateral. For example, if it’s a property you may need to prove that you own it outright. If there’s still a mortgage against it the lender may need to register a legal charge
How do business loans work?
A business loan can be likened to a personal loan. Before agreeing to the financing, your lender will propose a set repayment plan. This will include an interest rate, which is the amount charged on what you’ve borrowed, and a term, which is the length of the repayment plan.
The interest rate will either be fixed or variable. If it’s fixed, you’ll have certainty in how much your repayments will cost each month, and if you opt for a variable rate it can fluctuate. Most variable rates track the Bank of England’s base rate.
As for your term, this usually spans over a couple of years to a few decades. Typically, the shorter your term the more your monthly repayments will cost. Lengthen it and you’ll pay less each month but more in interest over the long-term.
Crucially, there isn’t flexibility around your due dates and you’ll need to strictly adhere to your repayment plan. If you miss a due date, then your credit score will take some damage and you’ll find it more difficult to borrow in the future.
Your business’s credit score will play a significant role in determining your terms. More established businesses with a track record of repaying previous debts normally attract a better deal.
Read more: How to check and improve your business credit score
You’re now subscribed to our newsletter, you’ll receive the first one within the next week.
What are the best rates for business loans?
A lot of business loans are negotiable. This means your rates will depend on the lender’s evaluation of your business’s financial health.
So, to get an understanding of what rates are available to you it’s best to get in touch with a broker.
What alternative funding could I consider?
If a business loan isn’t for you, then there are other types of financing to consider.
For those who are looking for financing to purchase key equipment, why not consider asset financing? One of its key advantages is that you’ll be able to own this equipment without any significant upfront costs, although it could cost more than a business loan in the long-term.
For renovating or expanding your business’s premises, you could opt for a commercial mortgage. To qualify for this form of finance you’ll likely be borrowing over £25,000 and the interest you pay is tax deductible. Like with residential mortgages, you will need to be aware of added costs such as valuation fees.
If you’re looking at financing a smaller purchase, or just looking for an extra way to manage your cashflow, consider a business credit card. It can be useful for simple office supplies and other small expenses, and you can find our best picks listed in our guide.
A government boost through the Start Up Loan Scheme
If you’ve yet to open your doors for business, and you’re finding it difficult to find funding from conventional sources, then one option is to apply for a start-up loan via the government.
Launched in 2012, the Start Up Loan Scheme has lent out just over £9,500 on average per start up. The funding comes via British Business Bank at a fixed rate of 6% per year, with applicants applying for a term between one and five years.
In addition to being UK based and over the age of 18, the scheme is only available to businesses trading for less than 36 months.
FAQs
Does my personal credit score affect my application?
While a poor personal credit score can harm your application for a business loan, other factors such as your company’s financial health have a much greater influence on whether you’ll be accepted or rejected.
Can I use a personal loan for business?
Some lenders will allow you to use the funding from a personal loan for business use. If you’re unsure whether your lender will allow this, speak to them directly.
How long does it take to get a business loan?
If you’re well prepared and your circumstances are straightforward, some lenders will have the funds in your account within 48 hours of your application. But if your application is more complicated, other lenders can take up to three weeks before making the final decision.
Important information
Some of the products promoted are from our affiliate partners from whom we receive compensation. While we aim to feature some of the best products available, we cannot review every product on the market.
