Compare the best business loans in the UK for February 2024 | Finder.com (2024)

A business loan can give a company the money it needs to get started or take its growth plan to the next level. Whether you need a few thousand pounds or a whole bunch more, for a little while or a long time, there are plenty of lenders out there to cater to the full spectrum of what you need.

This means that finding the best business loan is a matter of first understanding your business’ financial circ*mstances and needs, and then finding the loan or finance option that best meets those needs.

There are different types of business loans that work in different ways. What type you opt for can depend, among other things, on what stage your business is at.

Much like an individual, a company has a credit record and credit score. The healthier these are, the easier it will be to secure finance. A new business is obviously not going to have much in the way of a credit history, so a lender will either want to start small or will need some form of security. Loans for launching a new business or for a business which has just launched are often referred to as “start-up” loans. These are typically available over terms of one to five years, and can be government-backed.

More mature businesses have a variety of loan options, thanks to a credit history, a few years of accounts and an established turnover. These are in addition to other types of credit available such as business credit cards or factoring. Let’s take a look at some of the main loan options available in a little more detail.

Business loans can be a good option if you’re looking to borrow a large amount of money over a longer period and at a lower cost than a business credit card. However, this isn’t the most flexible option and it can sometimes be hard to meet the eligibility criteria.

Here are some of the main sorts of loans that are available to SMEs in the UK:

• Start up loans

  With in mind that companies looking for a start-up loan have been operating for less than 2 years, these loans typically only offer small sums with short terms (typically 1 to 5 years). With little or no accounts to go on, lenders may want to use a personal asset (generally a property) as security for the loan. Government-backed start-up loans are available, offering a fixed, low rate of interest and free mentoring for a set period, in addition to extra security for lenders.

• Small business loans

  Unlike a start-up loan, small business loan eligibility doesn’t necessarily depend on how long a company has been trading. The company does have to be “small” however, and exactly how small varies from lender to lender. Many require a minimum annual turnover. Small business loans can be secured or unsecured, and more often than not charge interest at a fixed rate over terms up to around 60 months (5 years).

• Short-term business loans

  If your industry is prone to seasonal variations, this is one scenario that could lead you to consider a short-term business loan. As you might imagine, these loans come with higher rates than, say, a five-year loan, as lenders will need to make the process worth their while. Alternatives to short-term business loans include a revolving line of credit such as a 0% purchase business credit card, or a decent overdraft facility on a business account, although these options typically come with lower credit limits.

• Business credit cards

  With a business credit card, you can borrow what you want (subject to a credit limit), when you want, so you’ll only pay interest for the days on which you borrow. Subject to a monthly minimum repayment, you can also pay back funds on terms that suit you. Unlike a fixed-term loan, which closes when all the money has been repaid, a credit card is a “revolving line of credit”, which means that the facility is effectively always open (which can be a mixed blessing).

• Medium- to long-term business loans

  Typically spanning over five years or more, these loans are designed to fund substantial projects that drive company growth. They may involve larger amounts of money to support ambitious ventures. Expect close scrutiny of your business plan, loan security requirements and a longer, more thorough application process.

• Revenue-based financing

  Revenue-based financing is a type of business lending where you will receive a lump sum of money for a percentage of your business’ revenue. Unlike traditional business loans, your monthly repayments may fluctuate with your revenue stream. So, if you’re having a particularly slow month, you will repay less and your repayment term will be longer.

• P2P business loans

  Peer-to-peer (P2P) loans aim to connect investors with SMEs looking for finance. By cutting out the overheads normally associated with high-street banks, these companies are often able to offer more competitive rates.

• Bad credit business loans

  Having limited or poor credit history can make it challenging to find a lender who is willing to provide financing for you or your business. However, there are many lenders that provide bad credit business loans, as well as a number of other finance options.

• Commercial mortgages

  A commercial mortgage is one that is taken out on a property that will be used for business or commercial purposes, and not as a residence. Commercial mortgages can be more complicated than personal mortgages, and you’re likely to need a bigger deposit.

• Invoice finance

  There are two main types of invoice finance: factoring and discounting. Both offer support to businesses with fluctuating turnover due to relying on client invoices for turnover. Invoice finance lets you borrow funds against the value of your unpaid invoices, minus a small fee.

• Asset finance

  If your business is in need of acquiring an expensive piece of equipment, like a vehicle, machinery, or computer system, asset finance could be an option worth considering. Instead of having to cover the cost upfront, you can pay it off in smaller instalments. Unlike a regular business loan, asset finance is secured against the cost of the asset itself. If you fail to repay the loan, the lender has the ability to take ownership of the asset.

• Merchant cash advances

  Business cash advances can be useful for small businesses that have inconsistent sales or process most of their sales through card transactions. You can effectively get funds upfront that is then paid off using a percentage of future sales.

• Business line of credit

  Regular cash flow can be a big concern for many businesses, and that is one of the advantages of a business line of credit. Instead of receiving a lump sum upfront like you would on a normal business loan, a line of credit gives you ongoing access to funds to use as you wish. You only pay interest on the amount of credit you use, but will need to repay what you’ve used in order to access the full limit again.

So what happens if your business is too young or small to qualify for a loan with decent terms? Or maybe it’s just a bad time to take on debt? You still have financing options.

• Get funding from investors. Small or young businesses could stand to benefit the most from selling a share of their enterprise in exchange for financing.
• Start a crowdfunding campaign. Set a fundraising goal, invest a little in marketing and collect small donations from family, friends, your community, fans or just random interested individuals!
• Apply to a government scheme. Various government schemes exist to encourage small businesses (often called “the backbone of the UK economy”). Learn more about government support for businesses.
• Take out a personal loan. Another option would be to consider a personal loan for business use, but there are some important implications to consider, and many lenders simply prohibit this use.

Here are some of the key features to consider when comparing business loans:

1. Amounts available. Having set out your business plan, you should know how much you need to borrow, and one of the first things to look at when evaluating a loan is whether or not it can offer you the sum that you need.
2. Terms available. You may have a fairly clear idea of the length of time you need to borrow for, or this factor may be dictated by the size of the monthly instalments.
3. Eligibility. Never apply for a loan without checking that the business is eligible for it. It’s a waste of time and demoralising – and the rejection could be visible to future prospective lenders.
4. Security required. It’s not unusual for lenders to ask for a personal guarantee – meaning an individual will be personally responsible for the loan if the business can’t repay it. Security can also take the form of a company’s realisable assets, such as a property, vehicles or equipment. Where no assets are available, it may be necessary to secure the loan on a director’s own property.
5. Total costs. It can be easy to obsess over APRs (rates), but perhaps more importantly, how much is this loan going to cost overall? When you’re trying to identify the best business loan, the loans that are cheapest overall are naturally a good place to start.
6. Interest rates. Is the rate offered variable or fixed? Is it competitive?
7. Fees. Look out for “product” or “set-up” fees as well as any annual/monthly account charges. Lenders sometimes offset an attention-grabbing low rate with product fees, so it’s crucial to also keep an eye on the total amount payable.
8. Repayment holidays. Repayment holidays are set periods when you don’t have to make any repayments. This might be, say, the first three months of a loan. This can give your company an opportunity to get back on its feet financially, but will usually extend the term of the loan by the same number of months, pushing up the overall cost of the loan.
9. Early repayment terms. It’s hard to predict what’s around the corner, let alone three or four years down the line. If the option to repay early is important to you, you’ll need to check the early repayment (or overpayment) terms of the specific product or products you’re considering. It’s important to note that “No early repayment fees!” does not necessarily mean that repaying early will save you money on interest.