Business Loans

Small Business Lending in the UK

What to look out for
  • Red You should be prepared to provide your business financials when making a loan application
  • Amber A small business can also use loans for debt relief
  • Green Small business lending provides access to the funds needed to sustain or grow your business

Small business loans provide the start-up and established business with the opportunity to speed up growth, invest in vital equipment and the potential for debt relief.

Why would you use small business loans?

Small business loans are a major component of SME funding. Whether it’s start-up business financing or small business financing for an established business, such funding can help a business buy equipment, acquire inventory or hire staff. Many business owners will use savings or credit cards when they need funds. However, those resources may not be enough. Small business lending provides access to the funds needed to sustain or grow the business. Even with a small investment, businesses can increase their capabilities more quickly than relying on available cash.

A small business can also use loans for debt relief. Previous debt can be consolidated into a new loan, reducing the number of payments required each month. This type of small business debt settlement may also lower interest rates you ultimately pay.

How do small business loans work?

UK SMEs have several options when it comes to small business finance. Loans, once approved, give the business owner the flexibility to invest in an immediate need such buying equipment or vehicles, providing a boost to day-to-day operations by improving cash flow or for a more strategic, long-term investment.

Remember, these are loans, you must pay back the amount borrowed (the principal), as well as interest on the principal. There may also be set-up charges and other fees.

You should be prepared to provide your business financials when making a loan application. Profit and loss statement, cash flow details and business plan can show the lender that you are a viable business and that you will be able to pay back the loan.

Small business loans can vary from around £500 on the low end to hundreds of thousands of pounds or more. Government funding for small businesses is available, either in the form of direct lending or government guarantees to lenders.

Grants are also available for both start-up businesses and established ones with the obvious benefit that the funds don’t need to be paid back. However, eligibility criteria may limit how the funds can be used.

What are the costs of small business loans?

The cost of a small business loan is primarily determined by the interest rate per year. However, some lenders charge additional fees, so it is important to ask. If you have a poor credit history or are not an established business, the interest rate charged is likely to be higher than for an established business with good credit. Use the representative annual percentage rate (APR), which factors in fees and other charges, when you consider the cost of a potential loan, not just the rate per annum. If this is not clear, ask the lender, as they must give you full details of the amount you will be charged.

How long does it take to secure a small business loan?

If you have an established business and a good credit history, small business loans can often be secured within a matter of hours and almost always within a day or two. This quick turnaround is commonly for an unsecured loan, which does not require security to be provided. If you are applying for a secured loan, the timescale is extended as the lender will want to value the security before the loan is approved. You will probably have to pay the cost of the valuation as well.

What type of security do I need for a small business loan?

For smaller amounts – typically below £25,000 – it may be possible to borrow without any security. This will usually require a personal guarantee from the director or directors of the company. This finance may be written as personal loans which carries the risk that defaulting on this type of loan is likely to damage your personal credit history as well as that of the business.

If your business does not have a good credit history, is not well-established, or if you require a loan for a larger amount, you will be required to offer security. This means the loan is secured against something of value, such as property, vehicles, shares or anything else the lender will agree to accept as security. A lender will usually offer no more than 75 per cent of the value of your security as a loan principal.

If you default on a secured loan, the lender can claim the security and sell it to recover their loan. A default on a secured loan will also damage your credit history.

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