A business loan is a fixed amount of money borrowed from a bank or lender, repaid in regular instalments over an agreed term with interest. It is one of the most common forms of debt financing used by UK businesses to fund growth, purchase equipment, or manage cash flow.
Business loans differ from an overdraft in that you receive the full amount upfront and repay it on a fixed schedule, rather than drawing down funds as needed.
How Business Loans Work
When you take out a business loan, the lender provides a lump sum which you repay over a set period, typically between 1 and 25 years. Repayments usually comprise both principal (the original amount) and interest.
The key components of any business loan are:
| Component | Description |
|---|---|
| Principal | The amount you borrow |
| Interest rate | The cost of borrowing, expressed as a percentage |
| Term | The length of time to repay the loan |
| Repayment schedule | Monthly, quarterly, or other agreed intervals |
| Security | Assets pledged as collateral, if required |
Interest can be fixed (staying the same throughout the term) or variable (changing in line with the Bank of England base rate or another benchmark).
Types of Business Loans in the UK
Secured Loans
A secured business loan requires you to pledge an asset as collateral, such as property, equipment, or stock. If you fail to repay, the lender can seize the asset. Secured loans typically offer:
- Lower interest rates than unsecured loans
- Higher borrowing limits (often £500,000+)
- Longer repayment terms
Unsecured Loans
An unsecured business loan does not require collateral, relying instead on your creditworthiness and business financials. These loans usually have:
- Higher interest rates to compensate for the lender’s risk
- Lower borrowing limits (typically up to £250,000)
- Shorter repayment terms
Start Up Loans
The Start Up Loans scheme, backed by the British Business Bank, provides government-supported personal loans of up to £25,000 per individual (up to £100,000 per business) for new and early-stage businesses. Features include:
- Fixed interest rate of 6% per annum
- Repayment terms of 1 to 5 years
- Free mentoring and business support
- No application fees
This scheme is particularly useful for entrepreneurs who lack the trading history required by high street banks.
Commercial Mortgages
If you need to purchase or refinance business premises, a commercial mortgage works similarly to a residential mortgage. Terms can stretch to 25 years, with loan-to-value ratios typically between 60% and 75%.
Eligibility and Requirements
Lenders assess several factors when considering a business loan application:
- Trading history — Most banks require at least 2 years of trading, though some specialist lenders accept newer businesses
- Credit score — Both the business credit score and the personal credit scores of directors are reviewed
- Annual turnover — Lenders want to see sufficient revenue to cover repayments
- Business plan — Particularly important for newer businesses or larger loan amounts
- Cash flow forecasts — Demonstrating your ability to service the debt
- Security — For secured loans, the value and type of collateral offered
If your business is structured as a private limited company, lenders may also require a personal guarantee from directors, which means your personal assets could be at risk even though the company has limited liability.
Interest Rates and Costs
Business loan interest rates in the UK vary depending on the lender, loan type, and your risk profile. Typical ranges are:
| Loan Type | Typical Interest Rate |
|---|---|
| Secured bank loan | 3% to 8% |
| Unsecured bank loan | 6% to 15% |
| Start Up Loan | 6% fixed |
| Alternative lender (unsecured) | 8% to 30%+ |
Beyond interest, look out for additional costs:
- Arrangement fees — Typically 1% to 2% of the loan amount
- Early repayment charges — Some lenders penalise you for paying off the loan early
- Late payment fees — Charged if you miss a repayment
- Valuation fees — For secured loans where asset valuation is needed
The Annual Percentage Rate (APR) gives you the true cost of borrowing including fees, making it the best figure for comparing loans.
Where to Get a Business Loan
High Street Banks
The major UK banks — Barclays, HSBC, Lloyds, NatWest, and Santander — all offer business loans. They tend to be more conservative in their lending criteria but offer competitive rates.
The British Business Bank
The British Business Bank does not lend directly but works through accredited partners to increase access to finance for smaller businesses. Its programmes include Start Up Loans, the Recovery Loan Scheme, and various equity programmes.
Alternative Lenders
Online and specialist lenders such as Funding Circle, iwoca, and Tide offer faster application processes and more flexible criteria, though usually at higher interest rates.
Business Loans and Your Balance Sheet
A business loan appears as a liability on your balance sheet. The portion due within 12 months is classified as a current liability, while the remainder sits under non-current liabilities.
Interest payments on business loans are an allowable expense for Corporation Tax purposes, reducing your taxable profit. This makes debt financing tax-efficient compared to equity financing, where dividend payments are not tax-deductible.
How to Apply
- Assess your needs — Determine how much you need, what for, and how quickly you can repay
- Prepare your documents — Gather financial statements, bank statements, tax returns, and a business plan
- Compare lenders — Use comparison tools or a broker to find the best rates and terms
- Submit your application — Provide all required documentation and answer any follow-up queries
- Receive funds — Once approved, funds are typically deposited within days to a few weeks
Keeping accurate accounting records strengthens your application and gives lenders confidence in your ability to repay.
Alternatives to Business Loans
If a traditional loan is not the right fit, consider other financing options:
- Overdraft — For short-term cash flow gaps
- Invoice factoring — Release cash tied up in unpaid invoices
- Asset finance — Fund equipment purchases with the asset itself as security
- Business grants — Free funding that does not need to be repaid
- Crowdfunding — Raise small amounts from many backers