Business loans
Compare business loan rates with Funding Options[1]
Who is eligible for a business loan?
Business loans are often taken out to help with start-up costs, or to enable a business to grow.
Eligibility for a loan will depend on your personal financial situation as well as that of your business.
As with any other borrowing, a bank or other loan provider will look into your credit history, but in addition they may also want to see a business plan or business accounts. Depending on whether you're a start-up or an established business.
Before applying, make sure your finances are in order and that you're as prepared as possible.
Taking out a business loan with your current bank may seem like the simple solution. But any bank will ask whether or not you can manage the interest and repay the loan in the time set. It's always a good idea to shop around and keep your options open.
Types of business loan
Depending on your needs and financial position, there are four main types of business loan to consider.
Secured business loans
These loans can be secured against a number of different things. Depending on how much you want to borrow, and what for.
Security may include a personal guarantee, security over whatever's being purchased with the loan or over assets in the business. It may even be possible to put your own home up as security.
Remember that your home will be at risk if the business fails to keep up repayments, so think carefully about this option.
Generally speaking, secured loans allow businesses to borrow larger sums of money than unsecured loans.
Unsecured business loans
An unsecured business loan is borrowing taken out from a bank, building society or peer-to-peer lender. Because the loan is unsecured, there's no collateral - like your existing assets - to back the loan.
The amount lent and interest rate will depend on the creditworthiness of you and your business.
Peer-to-peer lending
Getting a loan for your business via a peer-to-peer (P2P) lending lending platform could be another way to finance your business. With P2P lending, you borrow from individuals rather than a bank or lender.
Access to lending depends on the platform you choose. For example, some may only offer borrowing to sole traders.
Government-backed start-up loans
If your business is just getting started, it's worth looking into government-backed schemes too.
The Start Up Loans† programme was created by the Department for Business, Innovation and Skills in 2012 to help support people with a business idea but no access to finance.
Loans are low cost, unsecured and have a fixed rate of interest. But you must repay within five years.
Government schemes for businesses in response to Coronavirus
Bounce back loan scheme (BBLS)
This scheme offers small businesses including sole traders, loans from £2,000 up to 25% of your turnover. The maximum loan available is £50,000.
This loans are guaranteed by the government. Loans are for six years, but you can repay early. There are no fees, repayments or interest for the first 12 months. After that, interest is fixed at 2.5% a year.
Coronavirus business interruption loan scheme (CBILS)
CBILS is a government scheme aimed at small and medium sized businesses (SMEs) in response to the COVID-19 pandemic. So long as your turnover is less than £45 million, you could get a £50,001 to £5 million loan from the government.
Businesses applying to the CBILS scheme will need to show that they had a viable business prior to the COVID-19 outbreak.
There’s a separate scheme in place for businesses with turnovers between £45 and £500 million.
Alternatives to business loans
If you don't think a business loan is for you, there are some other funding options available.
Business credit cards
Getting a credit card for your business can be a quick way to access smaller sums of money.
Business credit cards generally offer an interest-free period on purchases, which can be helpful when trying to manage cash flow.
There's normally an annual fee. And you will be credit-checked.
Make sure you pay off the balance each month to avoid paying unnecessary interest charges or fees.
Cash-flow finance
Cash-flow finance allows businesses to release the money trapped in invoices, in effect advancing themselves the cash.
Some banks offer cash-flow finance, but many others don't. There are a number of fees attached, such as an administration fee at the commencement of the arrangement, plus a monthly service charge.
There might also be a higher interest rate than that applied to a standard business loan.
Overdrafts
Some business current accounts have interest-free overdrafts or charge a fairly low APR for them.
Using an overdraft responsibly could be helpful if you need to borrow small amounts for short periods.
Crowdfunding
Using crowdfunding investment to help start or grow your business is another way to access finance. Platforms such as Crowdcube allow anyone - individuals or professional investors - to invest in start-ups and growth businesses.
This is likely to involve giving away a stake of your business to investors.
Pros of a business loan
- A business loan offers certain levels of flexibility while also providing fledgling or growing businesses with certainty for the years ahead
- You can compare fixed and variable rate business loans
- Some variable rates may be available, which means the interest you pay fluctuates depending on the Bank of England base rate or market forces. With a variable loan, your monthly payments could go up or down at any time, so make sure you're comfortable with this risk
- Some business loan providers may offer a repayment holiday, which means you can take a few months off from repaying your loan if you're waiting on payment from clients or if you have a cash-flow problem. Be aware that if you do take a payment holiday, you'll pay more in interest as it will continue to accrue, and it'll take longer to pay off the loan
- You'll keep control over your business and you won't need to look to investors for help. Investors may be necessary if you need a large amount of cash to take your business to the next level
Cons of a loan
- If you take out a loan from a bank or other mainstream provider - as the majority of businesses do - you may have to agree to give regular updates about your business performance. And be subject to ongoing financial checks
- If you want to repay your loan early, you may have to pay an early repayment charge. Think carefully about the length of time you want to commit to borrowing
Frequently asked questions
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Can I get a business loan with a poor credit rating?
You might be able to get a business loan with a poor credit rating. You're more likely to get approval for a secured loan, where you've put up an asset as collateral. Expect higher interest rates and lots of checks on your business for a lender to be comfortable though.
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How long does it take to get a business loan?
It depends slightly on how much you want to borrow and for how long. If you're borrowing from a lender you already bank with it might be a bit quicker. The key thing when applying for a loan is to have all your documents to hand. Things like bank statements, business accounts and forecasts. It'll speed up the process. Check with the lender beforehand so you know what information you'll need.
Guides to business borrowing
[1]Gocompare.com introduces customers to Funding Options Limited, who help UK firms access business finance, working directly with businesses and their trusted advisors. Funding Options Limited are a credit broker and not a lender. Funding Options Limited are authorised and regulated by the Financial Conduct Authority. Gocompare.com's relationship with Funding Options Limited is limited to that of a business partnership, no common ownership or control rights exist between us.