Best Business Loans

How do business loans work?

What is a business loan?

Business loans are a form of credit available to companies. Like most other loans, they involve borrowing a sum of money and repaying the amount (plus interest) over a set period of time, the key difference being that the loan is tied to the business, not the individual.

Interest will be charged at either a fixed or variable rate. Taking out a fixed business loan means the interest rate will remain the same for the whole term, with fixed repayments that are set from the outset. This can help make managing cashflow easier, as the repayments will always stay the same. With a variable business loan, however, the interest rate could go up as well as down over time, and so too could the repayments.

The interest you’ll be charged depends on several factors, including: the size of the loan, your credit history, your company’s financial health, any collateral you have to offer and the overall risk you present to the lender. Enlisting a specialist loans broker could help to find the best business loans rates for your particular circumstances.

Companies will often find they’re able to borrow a greater amount with a business loan compared to individuals applying for a personal loan, but the benefits can depend on the situation. Find out more in our guide: Business loan vs personal loan: Which should I choose?

What can you use a business loan for?

Business loans can be used for a number of different purposes, such as:

• Starting or growing a company
• Hiring more employees
• Investing in stock or equipment
• Buying new premises
• Supporting research and development
• Smoothing cashflow
• Consolidating debt

Overall they can be a great way to finance small business expansion without needing to wait for earnings to catch up or having to bring in external investors, and provided the business plan is solid, loans should be a temporary measure that can help boost the company’s finances and be comfortably repaid.

Who is eligible for a business loan?

In order to apply for a business loan, you’ll first of all need to be a UK resident aged 18 or over who either already owns or is planning to start a business. Lenders will have other eligibility criteria as well, taking into consideration things like your personal and business credit rating, your business plan and any assets that could act as security for the debt, though how they’re weighted will vary between lenders.

Factors which can impact your eligibility for a business loan include:

• Your reason for requesting the loan.
• How much you’re looking to borrow.
• Your business plan, and how realistic your projections are.
• Your cashflow/business finances.
• Your business credit score (lenders will run a credit check).
• Your personal credit score, particularly if your business is new.
• The type of business you have (e.g. if you’re a sole trader, limited company, start-up, etc.)
• Any security you can put down as collateral, unless you’re opting for an unsecured loan.

Specific eligibility requirements will always vary between lenders, but ultimately, a lender needs to assess whether you’re a reliable borrower who can be trusted to meet the loan repayments. Some lenders will also require a personal guarantee before they’ll approve the loan.

What are the different types of business loans?

There are several key types of business loans available that can suit a variety of different needs and circumstances. These include:

Secured business loans

A secured business loan requires you to provide an asset, such as property, to act as collateral. If your business were to default on the loan, a lender could repossess this asset and sell it to cover any outstanding debt.

Depending on the value of the asset you put down, you may be able to borrow a larger amount of money with a secured business loan than if you didn’t have any collateral. Often seen by lenders as a lower-risk option, some may even charge a lower rate of interest compared to an unsecured business loan.

Unsecured business loans

If your business doesn’t have any assets valuable enough to act as security for a debt, or you’d rather not risk having your assets repossessed, you could opt for an unsecured business loan.

This type of loan doesn’t require any collateral. Instead, lenders rely more heavily on your personal and business credit history to determine whether you can be trusted to meet repayments.

However, the amount of money you can borrow with an unsecured loan will often be smaller than with a secured loan. You’ll also usually need to sign a personal guarantee that holds you, as an individual, responsible for repaying the debt if your business were to default.

Personal guarantees can be a useful way to get a business loan over the line, but they of course come with added risk, namely that you’ll be personally responsible for covering any losses. Find out more about them in our guide: Personal guarantees: What are they and how do they work?

Term loans

Term loans are defined by the amount of time you have to repay the debt:

Short-term loans are commonly used by businesses experiencing temporary cash-flow problems or unforeseen expenses. As suggested by the name, these loans are repaid over a shorter amount of time compared to most standard loans. This can make them a more cost-effective option, despite typically having higher rates and larger repayments, as they accrue less interest due to the shorter timeframe.

What’s more, as lenders often perceive short-term loans as less risky, they often have more lenient eligibility criteria and a quicker approval process. However, the amount of money you can borrow will usually be less than with a standard or longer-term loan.

Long-term loans, on the other hand, offer a longer window to repay the debt. This may appeal if you’re looking to borrow a more substantial amount of money to grow your business over a prolonged period of time.

While long-term loans tend to come with lower interest rates and less expensive repayments than other terms, it’s important to remember your business will repay the debt for longer. This could be made difficult if you or your business were to experience a change of circumstances in the future.

Alternatives to traditional business loans

Not sure if a standard business loan is for you? There may be alternatives to consider. These include:

Merchant Cash Advance

A Merchant Cash Advance (MCA) is a little different to the normal loan arrangement. This type of lending involves an MCA company providing an upfront lump sum which you then repay using a percentage of your future debit and credit card transactions.

As well as the lump sum, you’ll also need to pay a fee, known as a factor rate. However, be aware this will often be more expensive than the interest rate charged by other types of loans.

When it comes to repaying an MCA, meanwhile, you’ll also need to keep in mind there are no fixed repayments or set term; the amount you repay and how long it takes to repay the advance will depend on the volume of debit and credit card transactions your business makes each day.

Credit lines

For a more flexible form of borrowing, you could consider a credit line (or ‘line of credit’). Like a credit card, this allows you to borrow money at any time, up to a preset amount. A lender will determine this upper limit by using your personal and business credit history to gauge your creditworthiness.

Once established, you’ll be able to withdraw funds from your credit line at any time. You’ll need to meet minimum repayments each month but could pay more to clear any outstanding debt. If you take out a revolving line of credit, you can continue borrowing from the funds as soon as they’ve been repaid without the need to reapply.

Working capital loans

If you’re only planning to use a loan to finance the everyday running of your business, a working capital loan may best suit your needs. This type of loan can be used to cover costs such as rent, salaries and suppliers.

Peer-to-peer lending

Instead of applying through a bank, building society or credit lender, you could use a peer-to-peer (P2P) lending platform or broker to search for individual investors willing to loan your business money.

You’ll typically need to pay the platform or broker a fee upon being matched with a lender. As usual, you’ll then repay the loan, plus interest, over an agreed period of time.

Start-up loans

Specifically designed for new companies, a start-up loan is a way for businesses less than three-years old to access financing.

Most of these loans are unsecured, as it’s understood new businesses will have limited assets to act as collateral. This, combined with start-up companies often being perceived as riskier by lenders, means this type of loan usually comes with higher interest rates.

• Government-backed Start Up Loan

The Government-backed Start Up Loan scheme allows fledgling businesses to borrow between £500 to £25,000. Applicants are given free support and guidance to prepare a business plan, while successful candidates will also receive up to 12 months free mentoring.

However, it should be noted this is an unsecured personal loan rather than a business loan.

Changes to Start Up Loans in 2026

From 6 April 2026, the fixed interest rate charged by Government-backed Start Up Loans is 7.5% (up from from 6%).

The scheme has also been extended to businesses that have been trading for up to 60 months (up from 36 months).

How to apply for a business loan

There are a few important steps to take when applying for a business loan:

1. Work out how much you want to borrow

The first step is working out how much money you want to borrow. Depending on your business needs and goals for the funds this could be anywhere from a few thousand to millions of pounds, but it’s important to be realistic. You’ll need to consider what’s affordable and how long it will take to repay the debt, but you also need to make sure you’re borrowing enough to put your plans in motion. Bear in mind too that while spreading a loan over a longer term could help minimise monthly repayments, this will usually mean you pay more in interest over time. Conversely, a shorter term means your loan will accrue less interest, but you’ll need to cover larger repayments each month. Speaking to a broker could be helpful to work out your best option.

2. Finalise your business plan

While not a requirement for all lenders, having a clear, comprehensive business plan could greatly improve your chances of being approved for a business loan. This is because a carefully-considered plan demonstrates to lenders a sound understanding of your business, the market and your goals. It’s important to expand on how you intend to use the loan and ways it can help grow your business, as well as showing you’ll be capable of meeting the repayments.

3. Gather the necessary documents

Alongside your business plan, you’ll be expected to provide the lender with a range of supporting documents to showcase your business and prove its earning potential. This can include your business/financial accounts, bank statements and tax returns, and you’ll need to provide the usual proof of address and ID as well. You’ll also need to show evidence of any other forms of business finance you’ve secured, and should include details of any assets to be used as collateral.

4. Compare deals and check lenders’ criteria

The next step is to find the right business loan deal for your needs, making sure to check the lender’s eligibility criteria as well. Each lender will have different requirements – some will expect a certain turnover, for example, while others will need the loan to be personally guaranteed, and many will have certain credit scoring requirements. It’s important to know that you meet those expectations before applying to avoid the possibility of rejection, so it’s always worth speaking with a broker who can help track down the perfect loan for your business.

5. Make your application

Once you’ve made your decision, it’s time to apply! You can normally apply directly with the lender or via a broker, often online, and it may only take a few minutes to complete the application form. Waiting for a decision can take a little longer for a business loan than a personal loan, but once approved and the repayment terms have been set, you’ll have the funds released and can start using it to meet your business goals.

How long does it take to get a business loan?

The amount of time it takes to get approved for a business loan depends on the type of loan and the lender - ranging anywhere from a matter of hours to weeks, or maybe even months. Ensuring you’re adequately prepared by including all required documents when submitting the application could help streamline the process.

Once approved, you’ll typically receive the funds within two working days.

What are the risks involved with business loans?

Perhaps the biggest risk associated with a business loan is missing repayments. Late payments may incur a charge, while any assets used to secure the debt could be repossessed if the business were to default on the loan entirely. Plus, if you signed a personal guarantee, you’d need to pay out of your own pocket if the business struggled to repay the debt.

There are also some other pros and cons to keep in mind:

Finding the best business loan

Our business loan comparison chart provides details on a range of business loans currently available, allowing you to compare features such as minimum advances and repayment terms to find the best product for your needs.

Not sure what you’re looking for? Consider seeking advice from a specialist business loan broker.