Small business loans

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What is a small business loan?

A small business loan is a type of funding designed to help smaller businesses manage costs, invest in growth, or smooth out cash flow. The lender provides a lump sum that’s repaid over time, typically with interest. You’ll often have to pay an arrangement fee, too.

These loans are tailored for businesses that might not have extensive assets or a long trading history. As with any borrowing, you must ensure the repayments are manageable before taking one out.

Who can get a small business loan?

Most small businesses can apply for a small business loan, whether you’re a sole trader, a limited company, or even a startup. Lenders will usually look at things such as trading history, revenue, credit score, and what you plan to use the money for.

Even if you’re a newer business, you’ll probably still have options, although you’ll usually need to provide extra information or offer a personal guarantee. Generally speaking, the stronger your finances and business plan, the better your chances of being approved.

What kinds of small business loans are there?

There are several types of small business loans, depending on your business type, age, and funding need:

Term loans – a lump sum you repay with interest over a set time.
Short-term loans – like term loans, but repayments are made over a shorter period. These types of loans are handy for quick cash flow fixes.
Invoice finance – if you have issued invoices that have not yet been paid, you can borrow against these to boost cash flow.
Asset finance – used to fund the purchase or lease of equipment, machinery or vehicles, spreading the cost over time.
Merchant cash advances – if your business takes card payments, you can borrow money and repay it as a percentage of your daily sales.
Startup loans – a UK Government-backed scheme that offers a personal loan of up to £25,000 per director (maximum £100,000 if four directors apply) to help bring early-stage businesses to life.

What are the advantages and disadvantages of small business loans?

Small business loans are a tried and tested strategy that could help grow your business. Like any loan, it’s important to understand the pros and cons of each type of loan before taking on debt.

Advantages:

Access to funds – having the money up front helps you grow, manage cash flow, or cover unexpected costs.
Flexible options – different types of loan will have different advantages, so choose the type that suits your specific needs and repayment terms.
Keep control – unlike investment, you don’t give away any ownership of your business.

Disadvantages:

You have to repay it – your financial history will dictate how much you can borrow and what it will cost you, especially if you’ve got bad credit or limited trading history.
Personal guarantees – some loans may require you to put your own assets on the line. If you’re risk averse, this could make a difference.

What are the alternatives to a small business loan?

If a small business loan isn’t the right fit for your business right now, there are other ways to raise funds:

Business credit cards – handy for short-term spending and managing expenses.
Invoice finance – get paid faster by borrowing against unpaid invoices.
Asset finance – spread the cost of equipment, machinery or vehicles over time.
Merchant cash advances – repay borrowing through a cut of your card sales.
Grants – you don’t have to repay this money, but it is usually only awarded according to specific criteria. The competition for winning a grant can be tough and often the funds are ‘matched’, meaning you’ll need an equal amount to the grant available for the project you wish to finance.
Equity finance – bring in money from an investor in exchange for a stake in your business.

Each option has its own pros and cons, so it’s worth comparing them based on what your business needs and how comfortable you are with risk and repayment.

What our expert says ...

“SMEs have funding choices. Loans, even with personal guarantees, are the fuel of SME growth. Smart owners compare options, explore alternatives and find the right fit for their risk appetite."

- Andrea Reynolds, CEO & Founder of Swoop

Small business loan FAQs

What fees are involved in a small business loan?

When you take out a small business loan, it’s not just about the interest; there are often extra costs involved. Here are some common fees associated with small business loans:

Arrangement fees – a set-up charge for getting the loan in place (usually a percentage of the loan amount).
Interest – the main cost, paid monthly on top of your repayments.
Early repayment fees – some lenders charge if you pay the loan off quicker than agreed.
Late payment fees – miss a repayment, and you could get hit with extra charges.
Broker fees – if you go through a broker, they might charge for their service (though not always).

Always read the small print and check the total cost of borrowing, not just the headline rate. That way, there are no nasty surprises later on.

What’s the difference between a small business loan and a personal loan?

The main difference is who the loan is for and how it’s assessed:

A small business loan is designed specifically for business purposes, such as marketing, buying inventory, hiring staff, or managing cash flow. It’s based on your business’s finances, and usually goes into your business bank account.
A personal loan is for individual use, such as a car or home improvements, but some business owners use one to fund their business, especially if it’s new. It’s based on your personal credit and income, and the money goes to you personally.

Perhaps the most important distinction is that with a personal loan, you’re personally responsible for servicing the loan and your individual assets may be on the line if you fail to keep up repayments. With a business loan, the business is usually the borrower, though some lenders might still ask for a personal guarantee.

Who can take out a small business loan?

You can apply for a small business loan if you run a business in the UK, whether you’re a sole trader, limited company, partnership, or a startup.

Even if you’re just starting out, you may still have options; you might just need to show a strong business plan or offer a bit more reassurance to the lender.