Who is a business loan for?
A business loan is for anyone looking to invest in an entrepreneurial activity (be it physical goods, services, or online activity). They are designed for many different circumstances, including fast loans, short term loans, expanding existing businesses, startups, franchises and small businesses.
What types of business loan are there?
There are two ways of categorising business loans.
1. Unesecured vs Secured Loan
A secured loan uses your personal or business assets to “secure” the loan, where by if you cannot repay the loan your security will be used to recover the amount of the loan. For example if you used a certain amount of stock as security and you couldn’t repay, the lender would be entitled to that stock to sell and make up the amount you owed them.
An unsecured loan is simply a loan without any security as defined above, often received at a more expensive interest rate because of the extra risk involved with having no security.
2. Variable vs Fixed Rates
On a variable business loan, the interest rates you pay on your loan are adjustable depending on the Bank of England “Bank Rate”. This means that the amount you have to repay can vary from month to month.
A fixed rate business loan means that your repayments will never change, and will keep using the interest rate that you signed up with when you signed the loan agreement.
There are also sub types of business loans that you may be considering including:
- Short term loans – shorter periods of weeks to a few months.
- Peer to peer loans – multiple investors pitching in via crowdsourcing platforms.
- Invoice financing – outstanding invoices purchased by lender to free up cash now.
- Cash advances – loans taken against future credit card / debit card sales.
- Government start up loans – new businesses can benefit from up to £25,000 of government funding (click here to find out more).
Best UK Business Loans – Low Interest Rates
Below are the current business loan offers on the market from high street banks that are the cheapest in terms of interest rates / repayments.
Application Process of a Business Loan
What does the application of a business loan involve? Do you have what you need already? Find out below.
How to apply?
To apply for a business loan, you can either use an online application form through the provider you’ve chosen, or you can book an appointment to see an advisor and apply in person during that meeting.
It is often more convenient to apply online for most people, with many companies making decisions on loans under £25,000 within 48 hours.
What questions will they ask me?
The sort of questions they will ask depends on the loan you’re choosing, but they will typically be around:
- How much would you like to borrow?
- Why do you want a loan for this amount?
- How long would you like to borrow it for?
- Do you have security to back this loan or do you need an unsecured loan?
- Can you afford the repayments? Prove it.
- How good is your cash flow?
- How many debtors and creditors do you currently have?
What proof will I need?
Nothing says “you can trust me on this loan” like a good batch of proof, so preparing your proof ahead of time is vitally important.
A strong business plan detailing how the money will be used is a good start, but isn’t really proof until it’s put into practice.
The best proof you can have is:
- Business accounts and financial statements
- Personal accounts and financial statements
- Business legal documentation
- Cash flow projections
- Money owed vs money credited
Also having a strong online profile, with positive customer reviews and active social media engagement is often taken into account when assessing your eligibility.
How can I improve my chances of being approved?
You chances of being approved for a business loan go up if you:
- Have a good amount of creditors to your debtors.
- Have good cash flow projections.
- Have a strong history of accounts showing profit.
- Have substantial security for your loans such as assets.
- Have little to no personal debtors.
There is no one size fits all, and it’s simply about looking as low risk as possible to a lender.
Am I Eligible For a Business Loan?
There are some circumstances where you may or may not be suitable for a business loan, or represent too much risk for a lender to give you a good deal. We go into more detail on these factors below.
How will my bad credit affect a business loan application?
The easiest way to get a business loan when you have bad credit is to back it with security, such as stock or other assets. This takes the risk out of the equation for the lender as their money is secured, and so can open the doors to previously unattainable amount of money.
There will be some lenders who may risk accepting your application without any security, however you will probably end up paying for it in much higher interest rates, which could restrict your cash flow enough to make the loan not worthwhile.
They may also attach early repayment fees and initial charges onto your loan to make it more worthwhile for them to take the risk.
Always consider the reviews of an online lender and whether or not the terms and conditions could leave you at risk.
You can read more about unsecured business loans here.
Can I get a business loan with no bank statements?
Yes there are situations where you can get a business loan without a bank statement, the most notable being using a peer to peer lending platform, in which your loan application is open to all to invest into.
However it would be much better to generate a record of trading before applying for a business loan.
There are also loans available for startups of course, which we discuss above.
Can a LTD company apply for a business loan?
Yes of course, any company including limited companies are eligible to apply for a business loan. There will be different terms and conditions based upon the amount you wish to borrow and the health of your business, with some situations requiring a director to personally guarantee the loan will be repaid if the business fails.
Can someone who is self-employed / a consultant get a business loan?
Yes someone who is self-employed can get a traditional business loan from a bank, or an alternative such as crowdfunding / peer-to-peer loans. There may be terms that require security in the loan, and it’s always better to try and manage your finances on your own when compared to getting into bad debt.
Can I get a business loan to invest in property?
Yes you can indeed get a loan if you want to invest in property. If it’s property for your business, then you can apply for a commercial loan which can often go to upwards of £1 million.
There are also other options such as buy-to-let mortgages, auction finance, bridging finance, and development finance.
Can I get a business loan to start a franchise?
Yes it is definitely possible to use a business loan to start a franchise. You will have to demonstrate you understand all of the costs involved and have a solid business plan to propose to any high street lender, as a franchise is quite a popular choice for those just start out in business.
Alternatives to a Business Loan
There’s nothing wrong with comparing your options, so below we’ve got a comparison to the alternatives you may be considering when looking for business finance.
Business loan vs Cash Advance
If you have existing creditors to an amount fairly close to the loan you wish to receive, then a cash advance could provide you with a better form of funding.
A cash advance uses the guarantee that you will be paid at a later date to lend you the money now, great for cash flow.
A business loan will only be better if you either don’t have any creditors near the amount you need, or you cannot achieve a good interest rate for your cash advance.
Business loan vs Personal Loan
It is never recommended to use a personal loan to fund your business, as you have little to no protection if your business fails (which is unfortunately very common).
Business loan vs Commercial Loan
A commercial loans is usually only appropriate for large businesses looking to borrow a lot of money, or for small businesses looking to buy property / premises in which to operate.
They often start at the £500,000 mark, and come with substantial fees and required security.
Business loan vs Overdraft
A business overdraft agreed with your business bank can be a fantastic way to gain the cash flow you need to operate better. In a lot of cases, if the interest rates are favourable, it can be far superior to a business loan, as you will have unlimited flexibility up to the agreed amount.
However if you plan on borrowing a very large sum of money it can be much safer in the long run to use a business loan, as the fixed repayments become a part of day to day cash flow, as opposed to a looking overdraft that can feel very daunting at times.
Business loan vs Venture Capital
Getting venture capital is often the pinnacle of business financing. If you can get an experienced and well funded organisation to invest in your business then you will be very well sorted to expand and make your business a success.
However as part of the venture capitalist agreement you will always need to exchange some equity in your business. This compares to a loan where the amount borrowed + interest is all you owe to the lender. This could have long term repercussions if you have disagreements with the investor, and could also limit your profit in the long run.
You will have to come to a decision whether having another partner in your business will be a benefit or a hindrance.
Business Loan FAQ’s
Here are some answers to the classic questions we get about getting a business loan in the UK.
Are business loan fees tax deductible?
Charges for banking, overdrafts and credit cards are tax deductible according to the Gov.uk website. Although charges for loans aren’t specifically included in the list, they should be classed as the same type of charge, however consult your accountant to double check this before you do anything.
Is business loan interest tax deductible?
Yes business loan interest is tax deductible, as stated on the legal and financing page on the Gov.uk website, “You can claim business costs for interest on bank and business loans”.
Are business loan repayments tax deductible?
No, you cannot deduct the actual repayment of loans for tax purposes in the United Kingdom, however you can deduct the extra charges and interest due.
Can a business loan be written off?
Yes in some circumstances company debt can be written off. Sometimes it may come during an insolvency agreement, or potentially as past of a CVA (Company Voluntary Arrangement) where you company and the lender agree to a percentage of the debt being repaid over time.
Can I use a business loan for personal use?
If you take out a loan as part of a business agreement and then use it for other purposes then you are breaching the loan contract and so the bank / lender has the right to ask you to repay the loan immediately.
With so many alternative options for personal loans or interest free short term loans, there really is no reason to use a business loan for this.
Will my business loan affect me getting a mortgage?
Yes it could definitely affect you getting a mortgage, even if it’s just that you get a worse rate then you would do otherwise, particularly if the business loan was taken out using you as a personal guarantor.
Your credit rating is dependent on the amount of money you owe, and your history of repaying your debts. This means that how recently you took out your business loan and how good your credit rating was before that will have a strong affect on your likelihood of getting a good mortgage deal.
If you want to learn more about improving your credit rating then click here.
What does a business loan agreement look like?
A business loan agreement is a contract, and so it will contain similar parts to all other contracts, with some specific to business and loans, such as:
- Effective date of contract
- Definitions of terms and language
- Parties involved in the agreement
- The statement of payment promise, and any security involved
- Terms and conditions of the loan including interest rate and repayment terms
- Any penalties or extra charges
- Plan of action as a result of defaults
- Local legal information
Both parties will also state that as far as they are aware the information provided by both sides is accurate and all inclusive.
Are business loans secured?
A business loan can be secured or unsecured, and depends solely on which type you choose. If you choose a secured loan then it will use you or your businesses assets as security in case you cannot make the repayments on the loan.
Can my business loan me money?
Your business can loan you money. If you’re a director of the company then this loan is called a “Director’s Resolution”, in which case a value of over £10,000 is required to have shareholder approval, and you and the company may be due for extra taxes including corporation tax as a result.
For more information on this you can visit the IT Contracting website here.