Business loans explained

Whether you’re starting a new business or an existing enterprise needs a bit of investment, perhaps to buy new equipment, branch out, or pivot to a new way of working, then you’ve probably considered a business loan. 

Although there are other business finance options available, such as asset financing or bridging loans, a standard small business loan offered by a bank or high street lender is the first port of call for many business owners. 

To help make sure you get the right type of finance for your business, here’s all you need to know on business loans.

What is a business loan?

A business loan is any kind of loan offered to a commercial entity, rather than an individual person. Typically, a business loan can range from as little as £1,000 up to several million. Repayment terms can vary from one month to 15 years, depending on the type of loan and the lender. 

Business loan rates in the UK will also vary, depending on a number of factors - from the length and size of the loan to your business’s financial position.

There are so many types of commercial loans currently available to UK businesses that choosing the one that best suits your needs can sometimes be tricky. This guide can help you find the type of small business funding that is right for you.

What types of business loans are available?

When looking at how to get a business loan and weighing up the pros and cons of taking on any type of business finance, the first thing to consider is whether you want a secured or unsecured business loan. All the types of loan discussed here are either secured or unsecured, so understanding the difference is crucial.

In simple terms, an unsecured loan does not use your business assets as a guarantee, while a secured loan allows you to borrow money against any assets you use as security. The pros and cons of each are discussed later. 

  • Bank loan - The simplest type of business loan is a bank loan. This works just like a personal bank loan - your business borrows a sum of money and pays it back over a set period of time, with interest charges added. Banks often require a director’s guarantee before offering small business loans.
  • Revolving credit facilities - Some businesses, generally larger ones, use revolving credit facilities to access funding. These facilities allow a business to borrow money only as and when it is needed. The sums can be paid back at any point and interest is only charged on the amount borrowed. Such a facility can stay in place for many years and is often significantly larger than any individual loan taken out by the business.
  • Bridging finance - Many lenders - including banks - also offer short-term loans or bridging finance. These loans allow you to borrow over a much shorter period of time, maybe even just a few days. They can be used to cover short-term cash flow problems. But short-term business loans are usually offered at a much higher interest rate, so you will end up paying more.
  • Peer-to-peer loans - One newer form of financing available to UK businesses is what is known as peer-to-peer lending. This is done through online platforms where borrowers can ‘match’ with investors of any kind - including private individuals - who have money to lend and are looking for a return. As with bank loans, peer-to-peer lenders may need a guarantee from a director before offering a loan.

Who are the top business loan providers?

The best loan provider for your business will depend upon how much you need to borrow, what you want to borrow it for and for how long. That's because lenders offer different types of loans for different circumstances. 

And while some lenders will accept applications from businesses with bad credit, others will see this type of borrower as too big a risk.

To make sure your business is getting the right type of business loan from the right type of lender, our finance division over at Think Business Loans will compare what's on offer from the following:

High street banks

High street banks are those large retail banks that are household names and have branch locations all over the country. As the name suggests the banks are those with a high street presence which include RBS and NatWest, Lloyds and Bank of Scotland, HSBC, Santander, Clydesdale, and more recently Metro Bank.

High street banks offer a diverse range of finance that includes commercial mortgages, commercial and residential investment finance, property development finance, asset finance, factoring and invoice finance,  international trade finance and unsecured loans.

The amount of money the bank will lend you will depend on the type of business loan you need and their lending policies in different sectors (eg. the amount of loan available would be different between a manufacturing business and a hotel).

High street banks tend to offer competitive rates but are likely to be slightly more conservative than some of the challenger banks and alternative lenders.

Challenger banks

Challenger Banks are small and relatively new to the market retail banks. These banks rarely have a high street presence. Instead, they conduct all their business online - and perhaps on the phone - to help cut the typical costs and complications of traditional banking. This use of the latest financial technology is what tends to set them apart from traditional banks. 

In order to be defined as a ‘bank’, the company must be authorised to accept retail deposits by the UK finical regulator the Prudential Regulation Authority (PRA). Challenger banks can often only be approached via an Intermediary or Finance Broker. Some of the challenger banks will have a niche, for example, offer higher loan to values in areas such as Property Investment.

Challenger banks may be more willing to consider propositions where clients may not have the experience in a field that a high street bank might be looking for.

Alternative lenders

Alternative lenders are those that provide financial solutions that sit outside of the usual business loans offerings, like unsecured loans and commercial mortgages. Alternative lenders use technology to  match borrowers with the right type of finance solution, which includes products like peer-to-peer (P2P) lending, invoice finance, asset finance, and private equity.

What can business loans be used for?

The short answer is pretty much anything you need it for. A business loan can be used to help fund the purchase of premises for your business, to help you buy stock, or to cover ongoing running costs.

You might need a long-term business loan to finance a start-up company if you do not expect to bring in any revenue for your first few months. Equally, you could be a well-established business that is encountering a short-term and temporary cashflow problem and needs funding to tide it over.

At all times, you need to be aware of what a loan will cost you both in the short and long term. That means being aware of the rate charged on your business loan and of the consequences if you cannot make repayments.

Is a secured business loan or an unsecured business loan best?

An unsecured loan does not put your business’ assets (such as property or stock) at risk but might be more expensive. A secured loan is often cheaper and allows you to borrow more but risks handing over your assets to the lender if you cannot make the repayments.

What might be best for you depends on a number of factors, including the size of your business is, how much you want to borrow, and how much personal liability you are prepared to accept.

The advantage of a secured loan is that it may well allow you to borrow a larger amount and at a lower interest rate. But, if you can’t keep up with the agreed repayment schedule, you are at risk of losing the assets that you use to secure the loan.

Unsecured business loans can be easier to get, especially for a start-up that owns few assets and hasn’t been trading for long. The downside is that you are likely to be able to borrow less and that the interest rate could be higher, as the lender will be taking on more risk.

Is your business eligible for commercial loans in the UK?

Any business in the UK can apply for a small business loan, no matter their size. Having said that, when looking at how to apply for a commercial loan, you’ll find different lenders will need you to meet certain criteria before they offer a commercial loan.

Factors that could play a part include -  the size of your business, how long you have been trading, your financial situation, and your business credit score.

Your business credit score is important because it will not only affect your chances of getting a business loan, it will also have an impact on the rate of that loan. The lower your score, the higher business loan rate you are likely to pay.

How to choose the right type of small business funding

Choosing the right type of funding for small businesses is crucial. You need to make sure that the payment terms - and that includes both the rate of interest and the duration of the loan - suit the type of business you run.

Different types of business loans also carry different consequences if you can’t pay them. So you need to enter into any loan agreement fully aware of what might happen if, for any reason, you are no longer able to afford the repayments.

Lenders will generally charge you a fee if you cannot pay back your loan, and they may also increase interest rates. Failure to pay can also have a negative impact on your credit score.

If you can’t afford to pay a secured loan, you could lose the assets the loan is secured against, such as your premises. In the most extreme case, you could lose your business. In the case of unsecured lending, you as a director could be liable for any unpaid business loan. In the worst-case scenario, this can lead to bankruptcy. This is why it is vital you invest time into getting the right business loan at the start of your funding journey.

How to find a business loan with Bionic

Finding the right business loan for you can be daunting. But Bionic’s expert advisers and smart technology can help you choose the one that’s best for you.

We can also take all of the legwork out of the process of applying for a business loan. We will tell you what documentation you need at every stage and handle the application process for you.

All we need from you to get started is your business name and postcode.