Compare business loans

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What is a business loan?

A business loan is a financial product designed to help businesses cover costs such as startup expenses, expansion, or operational needs.

Unlike personal loans, business loans must be used for business purposes and require details like your company's turnover, profits, and financial health during the application process.

Business loans come in both short-term and long-term options, with fixed interest payments. To choose the right loan, it's crucial to determine your business's specific needs and assess various loan products.

Types of business loans

Asset finance: This type of finance allows you to spread the cost of essential assets you need to operate, such as equipment, machinery and vehicles.

Working capital loans: This is a type of short-term loan used to help with cash flow and other day-to-day running costs.

Startup loans: This type of loan is specifically for businesses under 36 months old. Many providers offer them. There's also the option of a government-backed Start Up Loan, where you can borrow between £500 and £25,000 and pay it back over a period of one to five years.

Bridging loans: Most often used in property purchases and development projects, this short-term funding option can cover the costs while you wait for funds to clear from the sale of a property or an asset.

Commercial mortgages: This is a long-term loan used to help fund the purchase of a business property.

Business vehicle finance: An option to finance new vehicles for your business. This helps spread the cost and avoids the need to pay out a large amount upfront.

Peer-to-peer loans: Also known as P2P loans, this is when your business borrows money from individuals or other businesses instead of a bank.

Invoice finance: Often used to help with cashflow, this is when you use your unpaid invoices as security for funding. A lender may buy your invoices for a percentage of their total value or it can work more like an overdraft.

Business start up loans

Starting a business often requires funding, but securing a loan as a startup can be challenging since lenders lack insight into your credit history or business viability. However, many lenders offer startup loans tailored for businesses under three years old. The application process can be tough, however, so it's essential to prepare by gathering comprehensive information, including a solid business plan, to increase your chances of success.

There's also the option of the government-backed Start Up Loan scheme, which provides access to unsecured personal loans of between £500 and £25,000. There's no application fee, and you can repay the loan over 1 to 5 five years. The scheme also offers free support and guidance to help write your business plan. If your application is successful, you’ll also be eligible for up to 12 months of free mentoring.

How to choose a business loan?

Choosing the right business loan requires careful consideration. Follow these steps to make an informed decision:

Define your needs: Clarify the purpose of the loan (e.g., working capital, expansion, equipment) and determine the amount needed.

Check your creditworthiness: Review your credit score and history. A higher score can result in better loan terms.

Research loan options: Understand the different loan types, repayment terms, and interest rates available to your business.

Compare rates and fees: Shop around for competitive interest rates and be mindful of any additional fees, including origination and prepayment penalties.

Assess repayment terms: Ensure the loan’s repayment schedule aligns with your business’ cash flow.

Evaluate loan amount and eligibility: Ensure that the loan amount offered is sufficient for your business needs, and review the lender’s eligibility requirements. Lenders have different criteria, so find one that aligns with your business’s profile and goals.

What are the risks of taking out a business loan?

While taking out a business loan can provide essential capital for growth or operations, it also involves certain risks that business owners should be aware of. Here are some common risks associated with business loans:

Debt burden: One of the primary risks is the potential for a significant debt burden. Monthly repayments can strain cash flow, especially if the business faces unexpected challenges or a downturn in revenue.
Interest rates: Interest rates can fluctuate, especially if you have a variable-rate loan. This could lead to higher monthly payments, impacting your profitability.
Default and collateral loss: If the business is unable to make loan payments and defaults, it may result in the loss of collateral. This could include business assets, personal assets, or both, depending on the type of loan.
Impact on credit score: Defaulting on a business loan can negatively affect your credit score, making it more challenging to secure financing in the future. A lower credit score may also result in higher interest rates on future loans.
Market risks: Economic downturns or changes in the market conditions can impact your business's ability to generate revenue. This, in turn, may affect your ability to repay the loan.