On this page:
Intro to Small Business Loans
What is a Small Business Loan?
Types of Business Loan
How Much is a Small Business Loan?
Small Business Loan Calculator
How to Get a Small Business Loan
Benefits of Getting a Small Business Loan
Intro to Small Business Loans
Business loans are crucial to growth for most small UK businesses; they allow a high-potential enterprise to leverage their strengths and transition to new markets or sectors and offer a range of financial and strategic advantages over other forms of fundraising such as equity or bond issuances.
Small business finance typically comes with lower interest rates than other types of financing and offers flexible repayment terms that can help small businesses manage their cash flow more easily.
The process can seem daunting, especially to small business owners who have never involved themselves in this side of the business before - after all, you're a manager, not a financier. So how does a small business loan work?
"A business loan can be a great option for nurturing and building up your small business."
What is a Small Business Loan?
A small business loan is a sum forwarded from a lender to a commercial entity for business purposes. Legally they are no different - nor regulated differently - from any other type of loan. But where a non-mortgage personal loan will generally have no purpose clause, a small business loan will usually mandate that the money advanced under the loan be used for strictly commercial purposes, often with even more severe conditions.
For example, a small business loan might explicitly require the loan to be used to acquire a particular asset or to pay running costs for a specific period. As a business owner, you need to ensure that you use the loan only for business finances.
Types of Business Loan
Secured Small Business Loans
Like all small business loans, secured loans function by requiring the borrower to pay the capital and interest payments. Generally speaking, small businesses are considered moderate-risk investments, and as such, sometimes lenders will require security regarding the loan. A small business loan will have more complex security than a mortgage - which is permanently secured upon the homeowner's property.
Typically, lenders will pick specific business assets to take particular security over (called a secured loan), meaning that in the event of an event of default, the lender can seize the collateral to recoup their losses; there is also sometimes a so-called "floating charge" where a charge is placed over all the shifting holdings of a business like stock or property.
"A secured loan puts your assets up against the loan as collateral."
A secured loan typically has lower interest rates than an unsecured loan, as they pose less of a risk to the lender. Secured business loans are often used for large purchases, such as new offices or large machinery.
Secured business loans can be a great option for borrowers who have bad credit or are looking to borrow a large amount of money. However, it is important to remember that you could lose your collateral if you default on a secured loan. For this reason, secured loans should only be taken out by borrowers who are confident that they will be able to make their payments on time and in full.
Secured business loans typically take longer to process than unsecured loans as the lender will need to evaluate the assets used as security.
Unsecured Small Business Loans
An unsecured business loan is a type of finance that does not require you to provide security. Unlike secured business loans, where the lender can sell your assets to recoup the cost of the loan, your company’s valuables are protected with an unsecured business loan.
"Unsecured doesn't require security, meaning no business or personal asset is at risk."
Unlike secured business loans, which are backed by some kind of asset such as a house or car, unsecured loans do not carry any risk to the lender. Instead, unsecured loans rely solely on the borrower's credit and income level to determine whether or not they are eligible for the loan.
While unsecured loans tend to have higher interest rates than secured loans, they can be an excellent option for individuals who have less-than-perfect credit or need quick access to cash without putting anything up as collateral.
This type of funding is an excellent option for businesses that don’t have business assets to offer as collateral or companies that prefer not to provide security. Love Finance only provides unsecured business loans.
"Unsecured loans are beneficial for businesses who need a loan quickly."
The small business loan landscape is increasingly varied and complex. Historically, small businesses had only one natural choice when raising money via a loan; they had to go to a bricks-and-mortar bank and borrow from them. However, in the last ten years, alternative lenders have exploded in number; these are not regulated like banks and often offer technological-based solutions for fundraising that allow them to lend to businesses on favourable terms.
Fixed-Rate vs Variable Rate
There are two main types of small business loans: fixed-rate and variable rate. Fixed-rate loans have an interest rate that is set for the life of the loan, while variable rate loans have an interest rate that can change over time. Both types of small business loans have pros and cons, and it's essential to understand the difference before choosing a loan. Read more about understanding business loan rates here.
Fixed-rate small business loans offer stability and predictable payments, which can be helpful for businesses that have tight budgets. However, if interest rates go down, you will not be able to take advantage of the lower rates. Variable rate small business loans offer more flexibility, as the interest rate can change with the market. This means that you could save money if interest rates go down, but you could also end up paying more if rates go up. Ultimately, the type of business loan you choose should be based on your specific financial needs and goals.
"You should do your research to decide whether a fixed-rate or variable rate loan is better for your business."
Invoice financing is a type of business loan in which businesses borrow money against unpaid invoices. This can be a valuable way for small businesses to get the money they need to grow.
There are two main types of invoice financing: factoring and invoice discounting. With factoring, businesses sell their invoices to a third party at a discount. With invoice discounting, businesses borrow money against their invoices and then repay the loan plus interest when the invoices are paid. However, invoice financing does have some trade-offs, such as higher interest rates and fees, so it's crucial to carefully weigh the costs and benefits before deciding if this type of business loan is right for you.
Invoice financing can be a good option for businesses that have difficulty accessing traditional forms of financing.
"Invoice financing allows businesses to borrow against their unpaid customer invoices."
Merchant Cash Advance
A merchant cash advance is a type of small business loan in which businesses sell a portion of their future credit and debit card sales in exchange for a lump sum of cash. It is designed to help businesses cover their day-to-day expenses.
The main advantages are that it is fast and easy to secure and can provide small businesses with much-needed funding in a short period. However, there are also some downsides to this type of business loan, such as the high interest rates and fees associated with these loans.
"A lender gives a business money for an agreed portion of their future debit/credit card sales."
How Much is a Small Business Loan?
There's no legal limit on how big or small a small business loan might be. Still, lenders will generally be reluctant to lend substantial amounts to the extent that the size of the loan will depend upon the amount of security you can stake, which is a good rule of thumb when considering loan finance.
Love Finance generally works with sums between £5,000 and £500,000, which can be used to fund anything from payroll to acquiring new business lines.
"How much you can borrow depends on several different factors."
There are several factors that will determine how much you can qualify for, including your credit score, the nature of your business, and the size of your total start-up costs.
To get an idea of how much money you may be able to receive with a small business loan, it's best to speak with an experienced financial advisor who can help you assess your unique needs and find the right funding solution for your small business.
Try our small business loan calculator to see what monthly repayments might look like:
This small business loan calculator is intended as an example only, and the lender should agree on exact payment terms before taking out a loan.
If you wish to repay your business loan early, we offer flexible repayment terms and never charge early repayment fees. Read more about our terms and repayment schedules here.
Benefits of Getting a Small Business Loan
There are many benefits that small businesses can reap by taking out a small business loan, such as:
Access to Working Capital
One of the most common reasons businesses take out loans is to gain access to working capital. Working capital is the money that a business has available to cover day-to-day expenses.
Cover Start-up Costs
A small business loan can also be used to cover the start-up costs associated with starting a new business. These costs can include everything from rent and inventory to marketing and advertising expenses. Love Finance does not currently offer startup loans, but we have partnered with Transmit, who are experts in startup business and will be more than willing to help if this is what you are looking for.
"There are a wide range of benefits associated with getting a small business loan."
Small business loans can also be used to finance the expansion of an existing business. This might include anything from opening a new location to adding new product lines or services.
Improved Cash Flow
Small businesses can also use loans to improve their overall cash flow. This can be especially helpful during times of slow sales or unexpected expenses.
Even businesses with solid sales can often find themselves in need of extra cash to cover operational costs or take advantage of new opportunities. A small business loan can provide the necessary funding, but it's important to understand how loans can impact your business's cash flow.
Taking out a loan will typically increase your monthly expenses, making it more challenging to cover your other costs and leaving less money available for unexpected expenses. However, a loan can also free up cash previously tied up in assets, such as inventory or equipment. In addition, loans can provide access to lower-cost capital, which can help improve your bottom line.
Small businesses might also take out loans to purchase inventory for their business. By taking out a small business loan, you can get the funds you need to buy the inventory you need without dipping into your own personal finances. This can be an excellent option for businesses that don't have a lot of extra cash on hand.
This means you can fulfil customer orders more confidently and efficiently, not worrying about whether you have enough stock.
"You could use your loan to buy new assets, buy stock, gain access to new equipment, pay staff wages, and much more."
How to Get a Small Business Loan
Contrary to popular belief, getting small business loans is quick and mostly painless!
The first step is to check your business credit score. You will be able to do these using websites such as Experian using what's known as a "soft check", and it's a good idea to do this before anything else in the process. You'll be able to see if you've been assessed as creditworthy, and if not, you'll be able to see the weak spots in your application and consider how to remedy them - maybe you have a current credit line you're not promptly paying, or perhaps you're in a high-risk industry.
As long as you ensure you make your loan repayments on time, getting a small business loan should not affect your business credit score; it will likely be beneficial. As long as you don't have any outstanding debts or unpaid CCJs, and a healthy credit rating - you should be able to access business financing.
"Your business will be subject to a soft-search, this will not harm your credit score."
At this preliminary stage, it's also a good idea to think strategically about the process. Why are you applying for a small business loan? What do you intend to use the funds for? Are your accounts in order (the lender will review these, so they must be properly drawn up and audited if necessary)? All of these things will be checked by any lender, so it's advisable to plan.
Also, check the business loan rates, loan agreement, loan term & loan amount to ensure that you get the best deal for your small business.
"We'll ask for some basic information about your business, but you won't have to have any face-to-face interviews or provide any business plans."
Once you've checked your basic eligibility (see below), all that's left is to fill out our two-minute application form. We'll ask for some basic information about your business, but you won't have to have any face-to-face interviews or provide any business plans. Alongside the application form, there are also various documents you should have ready in case we request them - annual accounts and bank statements are the usual suspects.
And that's it! We'll get back to you with our decision as soon as possible, along with a personalised quote showing the terms we're willing to lend. From that point, funding - the money reaching you - can occur in as little as a single day.
Is My Business Eligible?
We must ensure that all applicants comply; Parliament sets down guidelines to protect business owners looking to receive loan capital. There are also requirements that lenders impose as part of their requirements to make sure that we only extend credit to those who can afford to repay - again, these are here to protect you. We never want to put any small business or small business owner in a difficult position where they cannot pay back the funds that they owe - we always want to build up small businesses and help them grow.
A small business loan is a loan that is specifically intended for small businesses. Small businesses must meet several different criteria to be eligible for a small business loan.
"You must be a UK-based business to acquire a loan from Love Finance."
The first - and most obviously legal - requirement is age. You will be unable to take out credit if you are under 18. Usually, this should not be an issue as minors generally can't work as company directors or act as signatories for business accounts. For those rare instances where a minor is looking to take out a loan, it's advisable to take specialist legal advice and see other options.
One of the most important factors is that the small business has a good credit history. Another factor is that the small business must have a strong business strategy. Love Finance can currently only offer business finance to UK-based businesses.
If the small business meets all of these criteria, it will likely be able to get a small business loan.
It is often easier for limited companies to borrow money or those who have been trading for over three years. However, at Love Finance, we always do our best to offer business finance to sole traders.
Can You Get a Small Business Loan With Bad Credit?
When it comes to small business loans, several factors can impact the amount you will be eligible for. These include factors such as the size and age of your business and your credit score and financial history. Additionally, there are many different types of small business loans available, each with benefits and drawbacks.
"A bad credit score isn't the end of the world, but you should take steps to improve it where you can."
For example, some small businesses may qualify for low-interest microloans. In contrast, others may find that traditional bank loans or peer-to-peer lending platforms offer better interest rates and terms. Ultimately, it is important to consider all of your options and do your research before applying for a small business loan. With the proper preparation and knowledge, you can find the right lender to help support the growth of your small business.
After this, it's essential to see whether your business category is eligible. Specific industries will not receive loan funding from us; generally, companies in heavily-regulated sectors where we can't assess creditworthiness or structure loans. For example, if your business requires banking or weapons manufacturing, it's unlikely that we'll be able to offer you loan finance at this stage.
Finally, there are specific geographic requirements that we impose. As a rule, there won't be issues if you are a UK resident with a UK passport. If this isn't the case - for example, if you're an entrepreneur here on a particular type of visa or an EU or Commonwealth citizen - we may still be able to work further with you. Still, you must contact us early on to discuss the specifics of your case.
How to Improve Your Business Credit Score
There are a number of things businesses can do to improve their credit score and, as a result, increase their chances of being approved for small business loans.
"One way to improve your business credit is to ensure you are making payments on time."
First, it is vital to ensure that all information on your business credit report is accurate. This includes ensuring that all of your personal information is up to date and making sure that you are not in any outstanding debt with your business creditors.
Another critical factor is establishing a solid business credit history by making existing loan repayments on time and in full. This can be done by building up a good payment history that shows consistent repayment patterns over time.
Your credit score depends on several factors but most importantly, whether you have a track record of taking out credit and repaying it quickly. The best thing you can do to improve your credit score is to make sure you're not entering into arrears on any lines of credit you might already have (whether in terms of your business financing or in a personal capacity).
"Ensure you are always honest with the lender about your credit history."
If you need more advice on how you can maintain or build your business credit, read our blog here.
How to Apply for a Small Business Loan
We strongly believe in efficiency and simplicity in the lending process. What it takes to get a small business loan should be a compelling business and confident leadership, not endless reams of paperwork and red tape. That's why we pride ourselves on the speed with which we make decisions and the lack of paperwork we require. While we're significant users of cutting-edge technology, we're also aware of its limitations, so we don't use algorithms to make instantaneous final decisions, unlike some other lending platforms. It takes a little longer, but we're confident that it makes for better and more flexible decision-making.
"We want to make obtaining a business loan as easy as it can be."
Small business loans can be a great way to get the financing you need to grow your business. However, it is important to understand the eligibility requirements and terms before applying for a loan. By doing your research and preparing in advance, you can ensure that you find the right lender and get the best possible terms for your small business loan.
Love Finance strives to be the quickest broker on the market, offering competitive interest rates and allowing you to split the cost into affordable, fixed monthly repayments.