July 03, 2020

A Guide to Business Loans for Small Businesses

Every business, however large or small, needs adequate cash flow to operate well. Business loans for small businesses can provide companies with the financial help they need in a flexible format. In this article, we take a look at the most common forms of small business loans and what they’re typically used for.

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What is a small business loan?

A small business loan is a type of debt finance that enables businesses to fund an aspect of their operations or growth. It can provide a critical lifeline for companies in times of difficulty, as we’ve seen through the popularity of the government’s coronavirus loans for SMEs

Providing it meets the eligibility criteria, a business can borrow money from a lender. In doing so, it must agree to the lender’s repayment terms. The loan amount is paid back with interest in monthly repayments over a period of time that is outlined in the terms. 

 

What do small businesses use loans for?

Businesses borrow money for a number of reasons. As small business loans are typically borrowed over the short term, they are often used to boost working capital or buy necessary equipment/ inventory. However, they can also be used to help facilitate an expansion. 

1. Expand operations 

If your business is turning a profit, has a healthy cash flow and a positive forecast, you might decide to expand. Expansion could involve purchasing larger premises or hiring new employees, both of which can be expensive. A loan for small businesses can give you the financial boost you need to make it happen. 

2. Purchase equipment 

Business loans for small businesses can also help you to finance the equipment you need to improve business operations and productivity. 

3. Purchase more inventory

Similarly, a business loan can give you the funds you need to purchase the goods/ services you need to generate revenue.

4. Increase Working Capital 

You might decide to take out a business loan to boost your company’s working capital. Working capital is the money used in a business’ everyday operations and is calculated as current assets minus current liabilities.Working capital loans can be unsecured or secured and are designed with flexibility in mind. 

 

What are the different types of business loans? 

Business loans for small businesses come in various shapes, sizes and guises. Some lenders offer loans specifically for small businesses while others specialise in fast loans, short-term loans or loans for bad credit. Broadly speaking, business loans can fall into the following categories:

Secured loans 

A secured business loan is based on the assets your business owns, such as property, vehicles or equipment. This type of loan might be a suitable option if you don’t want to offer a personal guarantee. Essentially, if you don’t repay the loan, the lender is entitled to sell the assets to reclaim the money they are owed. 

Unsecured loans

With an unsecured business loan, you don’t have to offer security, making it a potentially suitable option if your business doesn’t own many assets. 

Business owners who don’t want to offer security or need the finance quickly might also choose to go down the unsecured route. The lender will take your trading history into consideration and may require a personal guarantee. 

 

Where can I apply for a small business loan?

There are lots of lenders out there today, each with their own eligibility criteria, interest rates and T&Cs. Funding Options is the UK’s marketplace for business finance – you can use our platform to compare lenders and see the finance options you may be eligible for. 

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1. High street banks 2. Challenger banks

Major banks will likely look for a strong balance sheet, security and a lengthy trading history before offering you a loan. Interest rates can be lower but many firms find they aren’t eligible for finance from a high street bank.

Funding Options is part of the Bank Referral Scheme which was set up by HM Treasury to help businesses who are unsuccessful with the major banks access funding. 

2. Challenger banks 

Challenger banks tend to offer similar products to high street banks but are more flexible when it comes to their lending criteria. As such, challenger bank loans can be more accessible and quicker to access, but it can still be slow in some cases.

3. Independent lenders 4. Small specialists

Large independent lenders are at the helm of the alternative finance space. Alt lenders are usually able to lend to a wider variety of businesses as they don’t have the same restrictions as major banks, however they can be more expensive. 

4. Small specialists

Specialist/ niche alternative lenders typically focus on one or two lending types and often specialise in a specific sector. Many provide a speedy application process and the costs can vary significantly depending on the lender. 

Instead of operating a “catch all” criteria, specialist lenders tend to be more flexible and take each application on a case by case basis. 

 

Small business loans for COVID-19

A range of business support measures, including loans and grants, are available to businesses that have been adversely affected by the coronavirus pandemic. Support for SMEs includes the Coronavirus Business Interruption Loan Scheme, Bounce Back Loan Scheme and the coronavirus Future Fund for startups. 

Visit our coronavirus business hub for more information or head straight to gov.co.uk to find out more. 

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Editorial team