Business loans

Business loans are a way to borrow a lump sum of money for a business, rather than for personal use. They’re a common way of raising finance to start up or support a company.

Business loans are typically the first port of call for organisations looking to expand operations or overcome short-term cash flow issues.

Business loans work in much the same way as any other type of loan. You apply to borrow a specific amount from a lender, then agree to pay back the loan, including interest, in regular payments over a set period of time.

Start Up business loans

If you’re just starting out, it’s worth looking into government backed Start Up Loans.

Running since 2012, the Start Up loans programme helps support business owners who are struggling to secure finance for their new venture.

Unlike business loans, Start Up loans are unsecured personal loans up to £25,000. Interest is fixed at 6% per year over the course of the loan, which needs to be repaid within five years.

It’s free to apply for a Start Up loan and there are no early repayment charges if you want to pay it off early.

To be eligible for a Start Up business loan you must be 18 or over, a UK resident, and be trading for less than 36 months.

Since the scheme began, 15,000 Start Up business loans worth over £100 million have been issued to help young entrepreneurs get their new businesses up and running.

Business loans work in a similar way to personal loans:

1. Check your eligibility for a business loan before you apply – that way you’ll know how likely you are to be accepted without affecting your credit score.

2. Apply online or in-person, depending on your lender.

3. Your lender will want information about your business income and expenditure.

4. Approval will depend on your company’s financial outlook, current financial situation and your own personal creditworthiness.

5. If approved, you’ll receive the money which you’ll pay back, plus interest, within an agreed timeframe.

Business loans can be used for a variety of different purposes such as:

• Startup loans

• Growth guarantee scheme (GGS)

• Commercial mortgages

• Asset finance

• Merchant Cash Advance (MCA)

• Invoice finance

• Unsecured term loan

• VAT loan

• Revolving credit

• Venture debt

• Trade finance

• R&D tax credit loan.

When you apply for a business loan, lenders will most likely ask what you want to use the money for. It’s important to note that you cannot use a business loan for personal reasons such as paying for a holiday or a wedding.

You may find it a lot harder to borrow money for your business with bad credit, but it’s not impossible.

If your credit rating is poor, you’re more likely to get approval for a secured business loan. But you’ll need to put up an asset as security. If your business is in financial difficulty, there’s more risk of you defaulting on your repayments, which means your asset could be repossessed.

Business loans for bad credit may also charge higher interest rates, and you might not be able to borrow as much.

It would be best to try and improve your credit score before applying for a business loan. A higher credit rating would give you access to a wider range of loans with competitive interest rates and a higher borrowing capacity.

The cost of your business loan will depend on how much you want to borrow, the APR you’re offered, and how long it will take you to pay back the loan.

Generally speaking, it’s best to try to repay the loan as quickly as possible. A longer term can mean lower monthly repayments, but you’ll pay more interest overall.

The following example is for illustrative purposes only, but it gives you an idea of how the cost of a loan could differ over two and seven years. It assumes there are no extra fees.

Applying for a business loan can be a long process. Lenders require more information than they would for a personal loan.

Lenders want to be sure that you can pay back the loan, and that your business plan is viable. So they may want to look at:

• Your business and personal credit scores

• Your account history

• How long your business has been trading

• Business turnover for the last 12 months

• Projected turnover in the next 12 months

• Assets to use as security if you’re applying for a secured business loan.

To be eligible for most business loans in the UK, your business must:

• Be based in the UK

• Be able to demonstrate it can repay the loan

• Have no late payments or county court judgements (CCJs).

Before you apply, it’s a good idea to shop around and compare business loans to find the best one for your needs.

Compare the Market doesn’t currently compare business loan options.