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Small Business Loans Explained

Bank lending is a normal part of trading as a business - but the multiple types of small business loans and varying terms can make it complex to know which you should apply for.

Almas Uddin
Almas Uddin

Founder and Mortgage Advisor

Almas Uddin2023-05-09
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Small Business Loans Explained

Bank lending is a normal part of trading as a business - but the multiple types of small business loans and varying terms can make it complex to know which you should apply for.

Some loans are specifically geared towards smaller companies, and others have minimum turnover criteria, so it's essential you know the pros and cons of your selected borrowing before proceeding with an application.

The Revolution Brokers team supports hundreds of commercial clients every year, facilitating competitive loans with minimum hassle.

If you'd like to learn more about any small business loan or information discussed here, please get in touch at 0330 304 3040 or email us at [email protected].

How Do Business Loans Work for Small Companies?

Loans for small businesses are the same as any other commercial lending product but are designed to assist SMEs in reaching their financial aims.

Most businesses will need to raise financing or take out borrowing at some point, and a cash injection might be used for a massive range of purposes. Common reasons to apply for a small business loan include:

  • Expanding the company
  • Investing in new equipment
  • Buying more stock
  • Relieving short-term cash flow issues
  • Covering running costs

You must work out how and where you'll use the funding since this dictates which lenders are most suited to your loan application.

For example, you might want to consolidate other business debts, ease trading pressures during tricky periods, or set up something long term to help you gradually grow the business.

There are countless lenders to choose between, from mainstream banks to niche providers, so whatever you need your small business loan for, it's very likely there is a suitable product out there.

Many businesses hesitate in seeking the funding they need due to concerns about lack of trading history or previous credit issues. Still, an experienced commercial broker such as the Revolution team can guide you through the process.

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What Are Small Business Loans?

Small business loans usually cover one of two main categories:

  • Start-up loans to help new ventures get off the ground.
  • SME finance to help existing businesses cover their costs.

A term loan is the most common product, whereby you take out a conventional loan and pay back the capital in monthly instalments, plus an interest element.

However, this is just one of the many types of business finance, so it isn't the only option!

For example, you might look into a merchant cash advance. The lender will evaluate your projected income and average transaction value and lend you an agreed value.

The business pays back the loan depending on their trade for the month. The repayment value varies according to turnover.

Small business loans, like any other, are either secured or unsecured. Secured means that you put forward an asset, typically a building and the loan is backed against that collateral.

Unsecured loans don't come with any lender security, so they're usually shorter-term with higher interest rates.

Should I Apply for a Secured or Unsecured Small Business Loan?

The key to remember is that even if an unsecured loan isn't contingent on a business asset, you still have an obligation to repay the debt.

Secured loans are usually cheaper because the lender has a lower risk.

If you don't repay the debt, the lender can repossess the asset you've used to secure the loan and recoup their losses.

Many lenders will mitigate unsecured lending risk by asking for a director's guarantee against a small business loan. That means you are personally liable for the debt if the business doesn't keep up with the repayments.

Unsecured loans usually mean a closer examination of the trading history and credit file.

What Types of Small Business Loans UK Can I Apply For?

There are thousands of small business loans, ranging from fixed-rate repayment to specific credit facilities hinged upon your trade.

It can, at times, be challenging to find approval from a mainstream bank, as they usually have rigid qualification criteria and longer application processes.

Therefore, alternative lenders are popular with small businesses that fall outside of the ordinary circumstances - for example, they need speedy financing, haven't been trading for two years yet, or have been turned down by their usual banking provider.

You can borrow anything from £1,000 to millions of pounds. The maximum depends on what you're using the loan for and your annual company turnover.

One solution for many small businesses needing a substantial loan is to look at a commercial mortgage to borrow a higher value at lower interest rates and pay the loan back gradually.

Whichever loan type you go for, we'd also recommend using a skilled broker to identify the exact costs.

Loans carry fees over and above the interest, so you need to know the total costs to factor these into your cash flow.

Now that's covered, let's explain some of the regular options!

What Are the Best Small Business Loans Without Security?

A merchant cash advance is a more flexible loan for small businesses. Usually, the loan is linked to your credit card or debit card sales transactions.

The lender will look at your average card sales and then offer based on your trading history.

You then repay the debt on a flexible basis, depending on the value of your income through card sales in that week or month.

Can I Apply For Small Business Loan Products on a Fixed Term?

A standard business loan with a fixed repayment period and static interest charge remains a viable option for many small businesses.

You will know how much your repayments will be per month and how long it will take to pay back the loan and can opt for secured or unsecured options depending on the assets the business has available.

Another option is a revolving credit facility, most commonly used as working capital finance to cover everyday costs, a bit like an overdraft.

The lender sets a facility limit, and then you can draw on that when you need to, paying interest only on what you've currently borrowed.

Other solutions might include:

  • Invoice finance, used by small businesses that invoice their clients on credit terms. The lender advances a percentage of the cash owed by your customer for a fee, and then you pay them back when your client pays their account.
  • Bridging loans are short-term products designed to bridge the gap between covering a cost and receiving income. For example, you might take out a bridging loan to finance start-up costs or purchase a trading premise.

Should I Apply For Small Business Bank Loans or a Credit Card?

Small business credit cards remain another option, and if you use the card wisely and always make your repayments on time, it can help build a positive credit score.

Company credit cards can help cover ad hoc expenses and have capital available immediately if you have an urgent cost to cover.

How to Get a Small Business Loan?

Before you decide which small business loan to apply for, you must have a clear idea about:

  • What you need the loan for.
  • How soon you can pay it back.
  • The interest you can afford to pay (and are willing to accept).
  • Whether you're comfortable offering personal guarantees.

It's also vital you know how you will pay the loan back. This plan is called the exit strategy for a bridging loan and is mandatory so the lender has confidence they will recoup their cash.

With such a vast volume of choices out there, all with varying terms, eligibility and interest rates, it can be complex to know which loan is the best option for your business.

Please get in touch if you'd like help working out the right way to finance your requirements or compare rates currently available on the small business loan market.

The Revolution Brokers team is available on 0330 304 3040 or via email at [email protected].

Almas Uddin
Almas Uddin

Founder and Mortgage Advisor

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FCA disclaimer

The content included in our articles, blogs, web pages and news publications is based on information accurate at the time of writing. Note that policies and criteria can change regularly throughout the UK mortgage lending market, and it remains essential to contact the consultation team to receive up to date guidance. The information included on the Revolution Brokers site is not bespoke to any circumstances or individual application scenarios and therefore is not intended to be used as financial advice. The content we share is designed to be informative and helpful but cannot be relied upon to provide individual advice relevant to your mortgage requirements. All Revolution team members are fully qualified, trained and experienced to provide mortgage advice of an independent nature.

We collaborate with lenders and providers who are regulated, authorised and registered with the Financial Conduct Authority (FCA). Should you require specific mortgage borrowing types, some products such as buy to let mortgages may not be FCA regulated. The Revolution team can provide further information about regulated and unregulated lending as required. Please remember that a mortgage is a debt which is secured against your home or property. Your home can be at risk of repossession if you do not keep up with the repayments or encounter any other difficulties in managing your mortgage borrowing responsibly. This also applies to any remortgage or home loan secured against your property, including equity release products.

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