If you’re considering a business loan, there are a lot of things you need to bear in mind. With a wide range of loans on the market and various products designed for speed, short terms, growth projects, or small businesses, it’s hard to know where to start. There are also many different lenders on the market — you can get a business loan from high-street banks, challenger banks, online lenders, and small local specialists.
With so many products and providers, the eligibility criteria, interest rates, and overall costs can vary significantly. Let’s take a look at everything you need to know about business loans.
Types of business loan
Business loans is a broad category, and can refer to lots of different products including:
Within these product categories, you’ll find loans designed for specific situations:
Some products are designed for speed, so you get the cash as fast as possible. Our record at Funding Options is 1 ½ hours from first enquiry to money in the customer’s account.
How fast a loan is largely depends on how prepared you are. Lots of lenders require detailed documents such as filed accounts and forecasts, and your ability to get these documents together can make the difference between a couple of days or a couple of weeks.
Short term business loans
Some loans are designed for the short-term, with agreements between 3 months and 2 years. Term loans of more than 2 years would be considered medium- or long-term. If you're considering a loan for a very short term, it's also worth considering revolving credit facilities and other business overdraft alternatives.
Loans for small businesses
Some lenders cater for small businesses specifically. Small business loans have historically been challenging to get from the banks, but with the range of alternative finance available these days, there are many more solutions out there.
It's often possible to get a business loan if you have a poor credit rating. Although it's certainly more challenging to borrow money with bad credit in the background, it's still very much worth exploring — and you might be surprised at the choices potentially still available if you're willing to offer security or a personal guarantee.
We’re specialists in helping firms find the lender that’s right for them from the whole market — so get in touch with us or apply online if you’d like help finding the best business loan for you.
Here’s a summary of what you can expect from different business lenders:
It’s common knowledge that the banks aren’t lending to businesses as much as they used to — the effects of the credit crunch and new banking regulations are still being felt years later — and lots of firms aren’t suitable for bank lending.
If you approach a major bank for a business loan, they’ll want to see a strong balance sheet, significant security and a long trading history. For those that are eligible for bank funding, it’s usually the cheapest option in terms of interest rates — but many other firms find it’s a long application process that leads to a ‘no’.
For these reasons, HM Treasury set up the Bank Referral Scheme. Funding Options is proud to be a government designated finance platform for the scheme, and we help businesses every day who were unsuccessful with the banks.
We've put together a list comparing the business loans from all the major high-street banks.Compare bank business loans
Challenger banks are similar to high-street banks on the products they offer and the overall cost, but generally have slightly more flexible criteria that means their loans are open to a wider range of businesses. Their application processes are normally faster too, although they can still be slow.
At the forefront of alternative finance, the larger independent lenders offer some of the best alternatives to the banks. These providers are large and established, with plenty of cash to lend, but don’t have the same restrictions as banks and are prepared to lend to a much broader spectrum of businesses and sectors.
Some are focused on one particular product while others offer the full range of business finance. In this area of the market you can expect more flexible criteria and much faster applications — the major downside being that they’re usually more expensive than banks.
Smaller specialist lenders are another important part of the alternative finance category, usually focusing on one or two types of lending. Their business loans are highly specialised, often designed for one particular sector, but this means the costs can vary widely.
Many of the smaller lenders offer very fast online processes, meaning you can potentially get a loan within a day or two. Best of all, instead of rigid criteria they’re much more likely to take a case-by-case view of your application for a loan.
Eligibility and criteria for business loans
With so many different lenders and products on the market, the eligibility criteria for business loans vary. In an initial consultation, expect to be asked about:
- Turnover and profit
- Bank statements
- Filed accounts
- Loan amount vs. turnover
- Trading history
- Payment history (e.g. CCJs, late payments)
While there are no set ‘standard’ criteria for business loans, there are a few basic factors that most lenders look at when assessing your business. Here are a few rules of thumb to bear in mind before you apply for a loan:
- The loan amount is less than 25% of your annual turnover
- Your business is profitable
- More than 24 months trading history (for most products)
- No outstanding CCJs or late payments
- Your business is based in the UK
All of these factors help lenders build up a picture of your business. Generally, lenders are unwilling to lend more than 10-20% of your annual turnover, and they'll want to see enough revenue to demonstrate affordability. If you’re not making much profit or making a loss, it’ll be difficult to get a loan, and a short trading history (less than 2 years) can make things more difficult too.
Having said that, you might be surprised by what's still available to your business, and many of the lenders we work with are more flexible than the banks.
If you’d like to find out more about what kind of business loan you may be eligible for, starting an application is the quickest way to find out your options.
Security and personal guarantees
Business loans fall into two main categories: secured and unsecured. For secured loans, you’ll need some security to offer, while for unsecured loans lenders will normally want a personal guarantee.
You can use a variety of assets as security for a secured business loan, including commercial property, plant and machinery, vehicles, and stock. Lenders have different criteria for what they’ll accept as assets.
Unsecured loans, on the other hand, don’t require physical security but will often require a personal guarantee. Normally, lenders will want the guarantor to have good personal net worth and be a UK homeowner, demonstrating affordability.
If you’re interested in a secured loan, you’ll need to think about the security you have available. For unsecured loans, it’s important to consider the implications of offering a personal guarantee.
If you’re not sure which type of loan is right for you, read our guide to secured vs. unsecured loans.
The interest rates you can expect to pay vary depending on your business profile. There are various risk factors that the lender will consider, and generally speaking the higher the risk, the higher the cost of the finance.
Credit rating is one of the best indicators of what interest rate you'll pay for a business loan. If your credit history is poor, you’re likely to pay a much higher interest rate. Risk is also partly determined by the term length you need and the security you're able to provide.
Part of the interest rate calculation is also driven by characteristics such as how established your business is and its profitability, because these factors have implications for your affordability.
It's important to remember that headline interest rates can hide a range of costs such as arrangement, termination and penalty fees. For this reason, the best way to get an accurate estimate of loan rates is to make an application with us — it's completely no-obligation to do so.
The Competition and Markets Authority (CMA) is expected to make business loan providers make their products more transparently and consistently priced — something we wholeheartedly support at Funding Options.
For the purposes of this indicative table, we've used three business profiles, representing low, medium and high levels of risk (from the lender's perspective). Many lenders use risk bands to categorise applicants, while others calculate interest rates on a case-by-case basis. Please note, this table is for research purposes only, and each provider has their own way of calculating interest rates.
- Profile A: Clean personal and business credit, good profits, trading history 5+ years
- Profile B: Minor blips on credit file in the past, but good recent performance
- Profile C: Recent credit problems such as satisfied CCJs or missed payments
|0–12 months||12–24 months||24–60 months|
|0–12 months||12–24 months||24–60 months|
|Profile A||From 5%||8%||9%|
* Most lenders won't offer unsecured loans for a longer term than 24 months for this risk category (talk to a Business Finance Specialist for details)
NB: These interest rates are illustrative at best, and do not include any fees that may be added on to the total cost of the loan. Remember that for loans of less than one year you won't actually pay a full year's interest, while for loans over a longer term the effect of compounding interest will be greater. For example, 21% per year over 48 months is more expensive than 28% over 12 months.
Rates can be very expensive for businesses with poor credit, because they’re inherently more risky to lend to. The good news is, many businesses do improve their credit profile over time, and qualify for cheaper rates later down the line. At the same time, if you’re offered an expensive interest rate it might not be the right time to take on debt finance. If you’re concerned about your business’s financial situation, contact the Business Debtline.
Business Loan Calculator
If you're considering a fixed-term business loan, you can use our simple calculator to find out how much the monthly repayments could be. Just enter the loan amount, interest rate and term length.
– / month
- Avg. Monthly Interest
- Total Interest
- Length of Loan
- Total Cost of Loan
If you’d like to find out the rates that could be available to your business, start an application — it only takes a few minutes to see your options.
Business loans guide
Business loans is a wide and varied part of the business finance market, so we’ve put together a comprehensive Business Loans Guide to help you find the right loan for your business.
The guide includes in-depth information like how you can choose a business loan, the different types of security lenders will accept, how the application process works, and what lenders look for in your application. Click here to sign up to our mailing list and download the guide for free.
- Asset-based lending
- Business loans for bad credit
- Business Loans Guide
- Case study: Expert Property Group
- Case study: Factory 45
- Commercial loans
- Debentures and floating charges
- Enterprise Finance Guarantee loans
- Frequently asked questions
- How to compare business loans
- Mezzanine finance
- Peer-to-peer lending
- Secured business loans
- Secured vs. unsecured loans
- Unsecured business loans