What is a small business loan?
A small business loan is a form of business financing that enables small businesses to fund their daily operations costs. The loan is often provided by a lender or a high street bank and is usually secured against an asset, or unsecured.
Small business loans provide startups and small businesses the financial boost they may need to succeed. They can be used for various purposes, from managing cash flow to business expansion, and enabling businesses to grow whilst keeping costs at a low.
When business owners borrow money from a lender, a repayment plan is agreed as part of the lender’s terms of agreement. The money then gets paid back, with interest, in scheduled monthly payments over a pre-agreed repayment period. There are two main types:
- Unsecured business loans
- Secured business loans
What is an unsecured business loan?
Unsecured business loans allow business owners to borrow money without using valuable business assets as security for the lender. This is a popular funding option for small businesses that may not have assets they can provide as collateral for unpaid loan repayments.
Small unsecured business loans tend to have higher interest rates and often require a director’s personal guarantee. This guarantee is a legally binding document that makes the business owner personally liable to pay the loan repayments if the business defaults on a payment.
At SME Loans, we offer unsecured funding products. Please be advised that when you apply for a loan, the lender you get matched with may require you to sign a personal guarantee.
What is a secured business loan?
Secured business loans allow small businesses to borrow money on the condition that the business offers ‘security’ if the company defaults on the repayment of the loan. This security includes business assets such as property and equipment. The lender will take these assets if the repayment fails.
These loans work best for small businesses with access to valuable assets that they can use as collateral. When applying for a secured loan, the lender will consider the proposed asset and may ask for a valuation to be carried out.
Once the asset, loan amount and repayment structure have been agreed on, you will then give the lender ‘charge’ over the item. This ultimately means that the lender will hold legal authority of the selected item if your business defaults and doesn’t manage to pay back the loan.
Please be advised that the amount of money you want to borrow will need to be equal to the value of the item you’re offering as security.
Top Tip: With secured loans, lenders prefer that you fully own your chosen asset. There are two types of assets you can offer to secured loan lenders, but most lenders are more likely to approve hard assets:
|Hard Assets||Soft Assets|
|Commercial Vehicles||Office Equipment|
|Heavy Machinery||IT Equipment|
Can I still get a small business loan during COVID-19?
Yes, you can still receive a small business loan during COVID-19 in the UK. The lenders that we work with are still operating despite the coronavirus and current lockdown measures. So, if you are looking for finance you can still apply normally via our online application form. It should be noted that as a result of the pandemic, services may be slower than usual.
If you are looking for information about securing inance for your small business, you can read our guide to sources of finance during COVID-19. Our guide discusses current schemes provided by the Government, such as the Coronavirus Business Interruption Loan Scheme (CBILS), and alternative sources of finance that are currently available on the market.
What can I use a small business loan for?
A small business loan can be used for a wide variety of purposes. As this type of loan is usually borrowed over a short-term period, it can help to increase your working capital or make necessary business purchases. A small business loan should not be used to pay off existing debts in the business.
How to use a small business loan.
If your small business is doing well, you might find yourself needing to move to a bigger premise, expand your workforce – or both. Expansion can be expensive, and you may not have the required cash on hand to make it happen. A business loan can help with expansion.
2. Purchase Equipment
You might be thinking about ways you can improve your business's daily operations for performance and productivity. Loans allow you to finance the specialist equipment that you need in order to do this.
3. Purchase More Inventory
As your small business grows, you need more high-quality goods and services secured to generate revenue. Raising funds to do this can be challenging, which is why a loan can be useful.
4. Training For Staff
A small business needs to be competitive in order to grow as an industry leader. Training and developing your small workforce is a good investment and will undoubtedly bring better results for your business in the long term.
Promotion is essential for small businesses to gain recognition and successfully progress. It can be difficult to source new customers and clients, but a business loan effectively allows you to invest in the advertising required to achieve this.
Top Tip: For helpful guidance on growing your business, refer to gov.uk. You'll find information and advice on how to attract new customers, develop your products and services and train your staff.
What are the best small business loans in the UK?
With so many financing options available, it can be a confusing and taxing process searching for the right one. From business banking to business credit cards, finding the right loan and provider is crucial to borrowing success. We have rounded up the 10 best small business loans the UK has to offer:
|Company||Loan type||Min - max loan available||Min monthly turnover||Min time trading|
|SME Loans||Unsecured loan / MCA||£1k - £500k||£5,000||6 months|
|Esme||Unsecured loan||£10k - £250k||£50,000 (annual)||3 years|
|Liberis||MCA||£2.5k - £30k||£2,500||4 months|
|Fleximise||Unsecured loan||£5k - £500k||£5,000||6 months|
|Iwoca||Unsecured loan||£1k - £200k||-||Loan dependent|
|Start-up Loans||Unsecured loan||£1k - £25k||-||2 years or under|
|Funding Circle||Unsecured loan||£10k - £500k||-||2 years|
|Nucleus||Unsecured loan||£1k - £150k||-||3 years|
|Funding options||Unsecured loan||10-30% annual TO||-||2 years|
|Capalona||Unsecured loan||£1k - £500k||£10,000 (annual)||5 months|
Why choose us for a small business loan vs our competitors?
Small businesses are the heart and soul of the UK economy. As leaders in the financial service sector, we are best positioned to provide unparalleled unsecured funding you can trust.
SME Loans and the lenders that we work with are regulated and approved by the Financial Conduct Authority and our commercial directors take pride in helping small businesses find the right loan. We keep it simple and do the hard work for you. Through SME Loans:
Your business can receive a small business loan for as much or as little as it requires. Choose an amount between £1,000 and £500,000.
- We don’t charge any fees, ever. It is free for you to make an application through our website.
- You can benefit from knowledgeable and experienced account managers and commercial directors who truly care about your business’ future.
How can I apply for a small business loan?
You can apply for a small business loan by filling out an online application with an alternative lender or going to a bank. You will need to state how much you want to borrow and for how long you need to make repayments. You will also need to provide personal details and relevant business information.
If you’re looking to apply for a small business loan with SME Loans, follow the steps below.
- Step 1: Once you have decided how much you want to borrow, click apply and fill out our application form, which will ask for your personal details and business credentials.
- Step 2: Shortly after submitting your application, one of our dedicated account managers will be in touch as they match you to the most appropriate loan provider for your business.
- Step 3: After a match has been made, the lender will give you the terms of agreement for your small business loan.
- Step 4: After you have agreed to the lender’s terms and conditions, the loan amount will be deposited into your account, and you will be able to access it within 24 hours.
Is my business eligible for a small business loan?
There are over 5.7 million SMEs in the UK. Research shows that small businesses are often reluctant to apply for funding in the fear they’ll be rejected. Thanks to the huge expansion of the alternative lending market, access to finance is available to more limited companies than ever before. Whilst we aim to help as many businesses as we can get the funding they deserve, we do have some basic eligibility requirements:
- Your business is officially registered in the UK
- You have been actively trading for a minimum of 6-months
- Your business has a minimum monthly turnover of £5,000
- You as the business owner is over the age of 18
What funding options are available to small businesses?
The great news is that there are several different routes you can take. Banks previously dominated the business lending landscape, but as their lending criteria continues to tighten, more and more small businesses are turning to online lenders who offer more affordable product options with far greater flexibility...
Merchant Cash Advance
A merchant cash advance differs to a business loan because there is no interest charged. Instead, you agree on a fixed upfront fee with the lender. With this option, lenders work directly with your business’ card payment processing company to analyse recent transactions.
The amount of money you are offered from a lender will be based on your average monthly card sales. Typically the more money you make each month, the more money you will be able to borrow.
When it comes to paying the money back, repayments are taken automatically as a small percentage of future card sales. For each customer card transaction your business processes using a designated terminal, a small amount will be automatically withdrawn.
We offer businesses merchant cash advance that enables an instant cash injection between £5,000 and £500,000. You can then repay the money comfortably, using a small percentage of future customer card payments.
Revolving Credit Facility
Previously, small businesses could turn to business overdrafts to cover gaps in their cash flow. Overdrafts are getting increasingly difficult to secure, so an alternative source is revolving credit. Operating similarly to overdrafts, once a maximum amount of money has been established, business owners can access the pre-approved funds as and when required. With revolving credit, interest is charged on the amount withdrawn whilst it’s outstanding.
This option is a revolving cycle of withdrawing, spending and repaying that is typically limited to a period of 6 months - 2 years. Lenders calculate the borrowing amount based on one month’s revenue, but once you’ve made your first repayment, you are then able to borrow more.
With this type of borrowing, the main concern for lenders is the amount of regular cash flow in your business’ account - but be advised that with revolving credit, higher fees are charged than with fixed-term loans.
Short term vs long term business loans
Short-term business loans are usually offered for a period of 6 months to 2 years. The average short-term business loan is taken out for 12 months. Medium to long-term loans have longer lending agreements typically lasting between 1 to 5 years, and some up to 10 years.
Short-term loans are usually the better option for small business owners. The money is quicker to access, and repayments only have to be made for a limited period. Long-term loans generally take longer to get approved, but suit companies that need a longer amount of time to pay the money back.
What are the pros and cons of small business finance?
What are the pros of secured loans?
You can typically borrow a lot more money with secured business loans, which can be useful for long term investments.
Secured business loans are generally easier to obtain, particularly if you are deemed as a risk by the lender. This is because the lender has extra reassurance from the collateral they can claim if things go wrong and you don’t manage to make repayments.
What are the cons of secured loans?
It takes longer to apply for and arrange a secured business loan than with other small business financing options. As there is an asset involved, you normally have to go through the process of organising a valuation and/or inspection, which means it will take longer for the loan to be approved.
The main disadvantage of secured business loans is the potential to lose your asset if you can’t keep up with repayments. But if you have faith in the ways you are trying to grow your business, repayment shouldn’t be an issue anyway!
What are the pros of unsecured loans?
The application process for unsecured business loans is faster and more straightforward than for secured ones. You don’t have to go through the extra processes involved with secured loans, which means you can access the money in a matter of days.
As the loan is unsecured, you don’t need to provide collateral so you aren’t at risk of losing a valuable business or personal asset if you struggle to make repayments.
What are the cons of unsecured loans?
Because unsecured loans aren’t backed by collateral, it’s harder for lenders to retrieve the loan if you default on repayments. As a result, lenders usually charge much higher interest rates on unsecured loans than secured loans.
Unsecured loans work well if you are considering a loan for a short term. The amount of money you can borrow for your business is relatively low, so if you need to borrow a more substantial sum of money, you may be better off choosing a secured loan.
Business Cash Advance:
What are the pros of a business cash advance?
Business cash advances are a great option if you have a bad credit rating. Lenders will assess your business based on the number of card sales processed each month. This means that a perfect credit score is not necessary, providing you are making good revenue each month.
Cash advances are also one of the most affordable ways to borrow. The amount you repay directly parallels the amount your business earns, so there’s no pressure to repay the amount faster than your business can afford to.
What are the cons of a business cash advance?
- Before receiving your cash advance, lenders will want you to agree to their terms which can sometimes impact how you run your business. Depending on the lender, you might be asked to change card providers and agree not to change business premises until the money is fully repaid. However, as a short-term loan option, these requirements are only ever temporary.
Revolving Credit Facility
What are the pros of a revolving credit facility?
Revolving credit is one of the most flexible forms of business funding. Unlike a loan, you only take the money when you need it and can repay and redraw as often as you like. As well as this, there is no long-term commitment. You can draw funds only once if needed and not use the facility again.
One of the main advantages of using revolving credit is that you only pay interest when you use the money, rather than for the whole time you are using the facility. Unlike a loan, interest is only charged on the amount withdrawn as it is outstanding, so you are only paying for what you use.
What are the cons of a revolving credit facility?
Revolving credit facilities typically run for 1-2 years, so they are also an example of short-term business financing. If you want to make greater investments or need longer-term funding, you might want to consider secured loans instead.
With revolving credit, interest rates are higher than those charged on traditional business loans. However, this is offset by the fact that you only pay interest on funds when they’re withdrawn, so if used correctly, they can work out cheaper.
Which finance option is best for my small business?
There’s no one size fits all when it comes to business. Each business is unique and when it comes to picking the right type of business loan, you need to be certain that you've worked out the most practical way of borrowing for your business. To do this, there are some questions you should ask yourself before making any hasty decisions:
- How much money do I need to borrow?
- How long do I need the money for?
- How long will it take me to pay the money back?
- How long has my business been operating?
- What shape is my business currently in financially?
- Will a short-term or long-term loan work best for my business?
- Do I have business assets I’m willing to offer for a secured loan?
- What is my business’ credit score?
- Do I have any other outstanding debts to pay off?
- Do I have a backup plan if things go wrong so that I don’t default on repayments?
See how SME Loans can help your small business.
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How can I make the most of my small business loan?
When it comes to your small business' finances, keeping on top of admin is crucial. Sticking to a careful and concise budget will prevent you from making common business spending mistakes, and ensure that the money you have borrowed is used sensibly and effectively.
Where possible, it’s a good idea to keep the loan in a separate account to your usual business account, transferring the money across as and when required. This will prevent you from spending impulsively and increase your capacity to make bigger, important investments in the future.
Don’t spend the money in one go. A sudden influx of cash can be exciting and overwhelming, so it’s important to stick to your business strategy and loan plans and spend the money wisely.
Maintain a good rapport with your lender. Ensure you’re making all payments on schedule and update your lender on any issues or unforeseen circumstances you encounter with repayments.
What is a business credit score and how can I improve it?
A Business credit score is a measure of business creditworthiness based on your business’ financial history, and lenders use them to decide whether businesses are likely to repay debt. Having a good credit score increases the likelihood of a business being accepted for a loan.
We aim to match all our small business clients with one of our financial products, but it’s always a good idea to check on your business’s credit report, as with a good score, it is likely that you will be offered more competitive interest rates. You can check your credit score by using Credit Passport to get an accurate view of your company’s credit rating.
As a starting point for improving your credit rating, here are some simple ways you can start to think about managing credit more effectively:
- Ensure you always pay back loans on time
- File your accounts well before the deadline
- Get your accounts audited to make them more credible
- Keep your personal credit record in good shape
- Complete any questionnaires sent by credit reference agencies
Check out our business credit score guide for more information and useful tips to improve your business' credit score.
What is the annual percentage rate on a small business loan?
As interest rates are determined by a series of factors, such as credit score, APR will vary between lenders. Therefore it is essential to clarify what the rate of interest is with the lender before you agree to the terms and conditions of the small business loan.
Lenders charge interest on money borrowed, which is calculated as a percentage of the loan. Where a business poses a ‘higher risk’, a lender will offer a higher interest rate to match the increased risk for lending.
What affects the interest rate on a small business loan?
When it comes to small business loans, lenders will assess your business profile in terms of risk factors, taking various factors into consideration. Interest rates depend on:
- The lender you’re matched with
- How long your business has been operating
- Your credit history
- Verified business history
- How much revenue your business is generating
- Your business plans and ventures
Top Tip: Experian's 'My Business Profile' allows you to see your business’s credit score, showing you the different factors that are influencing your score, enabling you to make important improvements.
Frequently Asked Questions
If we haven’t answered all your questions about small business loans, then take a look at some of the most frequently asked questions below.
What is a small business loan?
A small business loan is a form of business financing which is designed to help startups and small businesses. Small business loans come in a variety of forms, the main two types are secured business loans and unsecured business loans.
How to get a small business loan?
You can get a small business loan by filling out an online application. You will likely have to provide relevant documents in order to be accepted by a lender, such as personal details and business information. If your application is accepted, one of our broker’s will be in touch to discuss the next stages of the application with you.
Our online application supports iOS, Android and Google devices.
Why choose SME Loans for a small business loan?
Here at SME Loans, we work with a panel of top regulated lenders who are dedicated to helping your small business thrive. Our secure online application is quick and easy to fill out, to help make your process as smooth as possible. As a broker, we don’t charge any fees, so it is free to make an application on our website.
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