If your business needs a cash boost, you may be considering a small business loan. We’ve taken a deeper look so you can find out how small business loans work and compare some of the options.
But remember, a business loan may not always be the best option. You should conduct your own thorough research - and weigh up alternative options - before taking one out.
- Best business bank accounts compared
- The best invoicing software for small businesses compared
- RBS and NatWest offer over £1bn to small businesses
- What does business insurance cover?
We’ve only compared a few of the business loans available. Other providers are available and you should do your own research before making a decision.
What is a business loan?
A business loan is a loan for business purposes. The type of business loan you apply for is likely to depend on your business circumstances and why you need the money.
You can apply for a start-up loan to help get your business off the ground, a short-term loan to help ease cash flow issues, or a long-term loan to fund the expansion of your business, for example.
When to get a business loan
Whether you can get approved for a business loan depends on the criteria of the lender. There’s some funding available for businesses that are just starting out (see the section on Start Up Loans below). But for other loans, you’ll need to have been running your business for a certain amount of time. Contact the lender if you’re not sure.
Understanding business loans
There are several decisions you need to make when you’re looking for a business loan, and several things that you need to understand when you’re comparing loans. These are some of the key points.
Fixed rate vs. variable business loan
If you have a loan with a variable interest rate, the rate can go up and down, whereas a loan with a fixed rate means your repayments tend to be predictable. Most small business loans are fixed rate loans.
Unsecured vs. secured business loan
A secured loan is backed by an asset (property, machinery or a vehicle, for example), which means the lender can claim ownership of the asset if the loan isn’t repaid. An unsecured business loan isn’t backed by an asset, but the lender may ask for a ‘director’s guarantee’ instead, which means they may pursue the director for repayment if the loan isn’t paid off.
Whether you’re offered a secured or an unsecured loan may depend on how much money you want to borrow. Large loan amounts will usually need to be secured, whereas lower amounts are often unsecured. Unsecured loans may have higher interest rates, as they’re riskier for the lender.
Long term vs. short term business loan
You’ll also need to make a decision about your loan term, which is the length of time that you have the loan for. This is likely to depend on what you need the loan for, and how quickly you think you’ll be able to repay it. Different lenders have different minimum and maximum loan terms, and the term you’re offered may depend on your circumstances.
Business loans compared
There are lots of small business loans available, from government-backed start-up loans, to loans from peer-to-peer platforms, to loans from high street banks.
We’ve compared a few of the business loans available in 2018, looking at factors like loan amounts, eligibility criteria, minimum interest rates and application process. It’s important to understand this is only a guide: the loan you’re actually offered will depend on your circumstances and the details of your business.
It can be tricky to get approval for a business loan, and the lender will ask for lots of paperwork as part of the application process, including business plans and accounts.
Bear in mind that, as well as the eligibility criteria mentioned for specific loans below, most business loans require that you’re at least 18 years old, a UK resident, and that you’re not bankrupt or in a debt management scheme.
Whether a business loan is right for you depends on your circumstances. Remember that interest rates can be high and there are penalties for missed payments, so make sure you can afford the loan before you take it out.
Government-backed Start Up Loan
The Start Up Loans Company provides government-backed unsecured loans to people who are starting or growing a business. Technically, these are personal loans, granted for business purposes. Successful applicants also receive 12 months of business mentoring.
Loan amount: £500 - £25,000
Interest rate: Fixed rate of 6% a year.
Loan term: One to five years.
Fees: No application fee and no early repayment fee.
Eligibility: You need to be planning to start a UK-based business, or have a business that has been trading for less than two years.
How to apply: Complete the Start Up Loans registration form online. Later on in the application process, you’ll need to provide documents like a business plan and a cashflow forecast, but you’ll be given help to get these together.
NatWest Small Business Loan
NatWest emphasises the flexibility of its loans, ranging from small, short-term cash injections to bigger, long-term loans. If you have a NatWest Business account, you may be eligible for personalised rates. Security and/or a director’s guarantee may be required.
Loan amount: £1,000 - £50,000
Interest rate: Fixed. The rate depends on your circumstances and loan amount, but using a slider on the website, you can see an example of how much you may need to repay. The website gives a representative example of £7,500 with a loan term of five years at 9.56% a year (representative APR of 10%).
Loan term: One to 10 years.
Fees: No arrangement fee or early repayment charges.
Eligibility: NatWest says its loans are for small businesses with an annual turnover of up to £2 million.
How to apply: You can make a business loan application on the NatWest website.
HSBC Small Business Loan
HSBC has made efforts in recent times to show that it’s keen to lend to small businesses, launching a £10 billion fund for small businesses and running a competitor interest rate matching campaign, when it also offered a reduction in loan fees.
Loan amount: £1,000 - £25,000
Interest rate: Fixed. The interest rate is agreed at the outset. The website gives a representative APR of 7.4%.
Loan term: One to 10 years.
Fees: Fees apply, including an arrangement fee of £100.
Eligibility: There’s an eligibility checker on the HSBC website.
How to apply: If you’re an HSBC business banking customer you can apply online via your internet banking portal. Otherwise, you can apply over the phone or in-branch.
Santander Small Business Loan
Santander offers flexible loans starting at competitive rates and there’s no arrangement fee, but you need to have a Santander Business Current Account to apply.
Loan amount: £2,000 - £25,000
Interest rate: Fixed. Rates currently start at 4.9% APR.
Loan term: One to five years.
Fees: There’s no arrangement fee. Other fees may apply, including early repayment charges.
Eligibility: You must be a Santander Business Current Account holder to apply for a Santander Small Business Loan.
How to apply: The application process depends on your business. Some businesses can apply online, while others will need to call or visit a branch. Find out more on the Santander website.
Yorkshire Bank Online Business Loan
Yorkshire Bank has a four-step application process for its Online Business Loan. It’s designed for limited companies, and they say it can be completed in just 10 minutes, with a final decision within 48 hours.
Loan amount: £10,000 - £50,000
Interest rate: The rates are fixed and start from 8.75%.
Loan term: Six months to five years.
Fees: There’s a 3.5% of the amount borrowed, which is deducted from the loan amount. Interest is charged on the full loan amount. Yorkshire Bank don’t charge for lump sum repayments or early repayments in full.
Eligibility: Your business needs to be a private limited company registered in the UK (excluding Northern Ireland, the Channel Islands and the Isle of Man). You need to have been trading for at least 12 months, and your annual turnover can’t be more than £2 million.
How to apply: You can apply on the Yorkshire Bank website. You’ll need to have some information to hand, including company information, director details, financial information, and access to your mobile phone and email inbox.
Funding Circle business loans
Funding Circle is a peer-to-peer platform, so you borrow money from people and organisations. Funding Circle claims ‘you can access finance to help grow your business in as little as one week.’ Both unsecured and secured loans are available.
The state-backed British Business Bank has made £100 million available to small businesses so far through Funding Circle.
Loan amount: £5,000 - £500,000 unsecured (Secured up to £1 million)
Interest rate: The rate you’ll be offered depends on lots of factors, but Funding Circle says that business loan rates start at 3% a year.
Loan term: Six months to five years.
Fees: There’s a completion fee when you accept the loan, which is between 2 and 6% of the loan value. There’s no early repayment fee, or annual or renewal fees.
Eligibility: You need to have at least two years of Companies House reports if you’re a limited company, or formally prepared accounts if you’re a sole trader. Check your eligibility by using the checker tool on the Funding Circle website.
How to apply: You can apply on the Funding Circle website and get a decision typically within 24 hours.
What’s your experience of small business borrowing? Tell us in the comments.