What is a business loan?
A business loan is finance advanced to a company or sole trader and repaid, with interest, over an agreed term. It sits on the business's books rather than your personal credit file.
Terms range from three months for a working-capital facility to ten years or more for asset-backed lending, with amounts from £1,000 to several hundred thousand pounds.
Most UK lenders ask directors for a personal guarantee on unsecured lending, so the separation between business and personal risk is rarely absolute.
How do business loans work?
You apply with company details, recent bank statements and filed accounts. Alternative lenders often read your bank feed directly and decide within hours.
Once approved, funds are drawn down as a lump sum or a facility you dip into. Repayments are monthly, weekly or, for merchant cash advances, a percentage of daily card takings.
Here's a fictional example:
Meet Priya's coffee roastery
Priya needs £40,000 for a second roasting machine that will double capacity ahead of the Christmas wholesale season.
She takes a four-year unsecured business loan at 11% with a 2% arrangement fee, giving monthly repayments of about £1,034.
The new machine adds £3,500 of monthly gross profit within two quarters, so the facility pays for itself well before the term ends.
What types of business loan are available?
Unsecured term loan
No asset security, decided on trading performance and director guarantees.
Fast to arrange, typically £5,000 to £250,000 over one to five years.
Secured term loan
Backed by property, equipment or other assets, so rates are lower and terms longer.
Suits larger amounts where the business owns tangible security.
Revolving credit facility
A pre-agreed limit you draw and repay as needed, paying interest only on what's used.
Ideal for seasonal cashflow rather than a one-off purchase.
Merchant cash advance
Repaid as a fixed percentage of daily card takings, so quiet weeks cost less.
Popular in hospitality and retail, but the effective annual cost can be high.
Is a business loan right for my company?
Business borrowing usually makes sense when:
- 1
The spend generates a return
Equipment, stock or hiring that produces more margin than the loan costs.
- 2
Cashflow timing is the problem
Profitable businesses with slow-paying customers benefit from short-term facilities.
- 3
You're taking on a bigger contract
Upfront delivery costs can be funded and repaid from contract revenue.
What do lenders look for?
Requirements vary widely, but expect checks on:
Trading history: Six to twelve months minimum for most alternative lenders; two years plus for high-street banks.
Turnover: Often £5,000 to £10,000 per month as a floor, with the loan sized against annual revenue.
Bank statements: Three to six months, used to assess income stability, returned payments and existing debt.
Director credit and guarantees: Personal credit files are checked and a personal guarantee is standard on unsecured lending.
Filed accounts: Companies House filings and, for larger facilities, management accounts and forecasts.
How to compare business loans
Look past the headline rate and check these five things:
- 1
Representative vs actual rate
Business lending generally isn't covered by the consumer representative-APR rules that apply to personal loans, so the rate you're quoted is usually the rate that applies to you — get it confirmed in writing before signing.
- 2
Total cost of credit
A longer term lowers the monthly payment but raises the total interest paid. Always compare the total repayable figure, not just the monthly amount.
- 3
Fees
Arrangement fees, broker fees and early settlement charges can add several percent to the real cost, on top of the headline rate.
- 4
Personal guarantees
Check whether a director's personal guarantee is required, and exactly what it puts at risk if the business can't repay.
- 5
Speed and flexibility
Same-day funding, flexible repayment dates and early-repayment terms often matter more than a 0.5% rate difference for a growing business.
Business loan pros and cons
Pros
- Keeps ownership — no equity given away
- Interest is a deductible business expense
- Fixed terms make forecasting easier
- Fast decisions from alternative lenders
Cons
- Personal guarantees are usually required
- Arrangement fees add to the real cost
- Short terms mean high monthly payments
- Rates rise sharply for younger businesses
Business loan or overdraft?
An overdraft is flexible and cheap when used briefly, but it's repayable on demand and banks have withdrawn facilities at short notice in the past.
A term loan gives certainty: the money can't be pulled and the repayment schedule is known, which is what you want for an asset that pays back over years.
Many businesses run both — a term loan for the investment and a modest revolving facility for the gaps between invoices.
What happens if the business can't keep up repayments?
Missed payments affect the business's credit file, and where a director's personal guarantee was given, can put personal assets at risk too — check the guarantee terms before you sign, not after a payment is missed.
Speak to the lender as early as possible. Most business lenders will discuss a revised repayment plan or a short payment holiday rather than default straight to recovery action.
Free, impartial help for business debt is available from Business Debtline (run by the same charity as National Debtline, but specifically for the self-employed and small business owners) and your accountant.
What are the alternatives to a business loan?
Other funding routes worth weighing up:
Invoice finance
Advances cash against unpaid invoices, so funding grows with sales rather than sitting as a fixed debt.
Asset finance
Spreads the cost of equipment or vehicles over their useful life, with the asset itself as security.
Equity investment
No repayments, but you give up a share of the business and future profits permanently.
FAQs
About this guide
Written and reviewed by the Grow Your Business team, and kept up to date as rates, rules and provider terms change.
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