Business Loans

Loans are one of the most common ways in which businesses raise money. A lender provides money which the business repays, with interest, over a set period of time.

There are many types of business loan, available over a wide variety of timeframes and on a secured or unsecured basis.

With a secured loan, the borrower provides “security” to the lender which acts as a secondary source of repayment if the business is unable to repay the loan. Security can take different forms but is usually an asset owned by the business such as a property. Because there is less risk to the lender, interest rates can be lower compared to unsecured business loan rates.

With an unsecured loan no assets are taken as security. However, in cases of limited companies with no assets, personal guarantees from the directors or third parties may be required to obtain the loan.

Loans may be offered on a fixed or variable rate of interest. For a loan offered with fixed interest rate your repayments won’t change, so you know exactly what you need to pay for the duration of the loan. However, early repayment fees may be charged if the loan is repaid early. If you are offered a business loan with a variable rate of interest your repayments can go up or down during the duration of the loan agreement as it will be subject to both the lender’s interest rate and the base rate set by the Bank of England.

The UK has a highly competitive business loan market and the costs depend on a range of factors, including the overall market, each lender’s risk policies, the costs of their funds and their capital, and the administration they need to undertake to assess and set up the loan.

When applying for a business loan, your business will need to demonstrate it can afford the repayments. You will typically be asked for profit and loss and cashflow statements and projections – and may also be asked for a business plan.

If your business has any outstanding county court judgments (CCJs) or has a poor credit score or rating, this will have an impact on whether or not your application is approved and the interest rate offered.

If a small or medium sized business makes an unsuccessful application for borrowing to a designated bank*, the bank is obliged to offer the business a referral to the online finance platform which is designated by the government. These platforms can help firms find a finance provider that may be willing to offer the finance needed.

Businesses can also approach a Community Development Finance Institution (CDFI). CDFIs are non-profit lenders that provides debt finance and support to businesses through a relationship-based approach to lending and may lend when other providers might not be willing to.

* AIB Group (UK) Plc (t/a First Trust Bank), Bank of Ireland (UK) Plc, Barclays Bank Plc, Virgin Bank Plc, Northern Bank Ltd (t/a Dankse Bank), HSBC Bank Plc, Lloyds Banking Group Plc, NatWest Group Plc, Santander UK Plc