A guide to the types of business loans in the UK

Is your business in need of a little extra cash? Here is our guide to business loan options available here in the UK.

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When it comes to businesses, there are multiple funding options available here in the UK. Whether you are a small start-up or a large, established company, the UK market offers a variety of business loans.

Secured loan

This is a type of loan where the business provides some sort of collateral as security. This collateral is typically in the form of an asset, such as property, machinery or a vehicle. For this reason, secured loans are more suited to established companies rather than start-ups.

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The advantage of a secured loan is that your business is typically able to borrow larger amounts and the interest rate is usually lower than that of an unsecured loan. Lenders are usually willing to lend more and give more favourable rates because your business has provided security in the form of that asset.

However, bear in mind that if you default on the loan, the lender can claim ownership of the asset you have borrowed against. 

Unsecured loan

An unsecured loan is a lump sum which isn’t backed by an asset. Instead, you may find that the lender asks for a ‘director’s guarantee’. This means that if the loan isn’t repaid, the lender could pursue the director for payment.

Unsecured loans are ideal for start-ups or small businesses that do not have large assets to secure a loan against.

Unsecured loans tend to be for lower amounts and come with higher interest rates compared with secured loans, as no collateral has been provided.

Short-term business loan

Sometimes businesses just need a quick cash boost and don’t want to be tied into making repayments for a long period of time. This is where a short-term business loan may be useful.

These loans are offered over a few weeks or months and can go up to £200,000. However, because they are over a short time period, these loans tend to have higher interest rates than other borrowing.

Peer-to-peer business loan

This type of business loan involves your business borrowing money from investors instead of from a bank. It’s typically conducted through a specialist online platform and allows a business to access a loan funded by individual investors.

An advantage to using this type of funding rather than a traditional bank loan is that the criteria for borrowing are often less strict and you may be able receive the cash more quickly. However, costs can sometimes be higher than they would be if you were dealing with a bank.

Invoice financing

This is where a lender buys your outstanding invoices, thereby releasing the money you are owed by customers.

There are two main types of invoice financing: factoring and discounting. Factoring is where the lender manages the sales and collects money directly from your customers. Discounting is where lenders release funds and you pay back the outstanding balance as your invoices are paid by customers.

The cost of this type of borrowing comes in the form of a service or discount charge. The service charge is calculated as a percentage of your company’s gross turnover, while the discount charge is similar to interest payments on a business loan and is levied on the money you draw down. 

Cash advance loan

A cash advance loan is where you borrow money against your business’s future debt or credit card sales. One thing to be aware of with this option is that it is hard for lenders to quote an interest rate, as the amount you are required to repay depends on your business’s card takings. Instead, there will likely be fees when you take out the loan and then daily fees going forwards.

Government-backed start-up loan

New businesses may find it hard to get funding. For a lot of business loan options, you need to provide tax returns, ongoing balance sheets and profit and loss statements for the last two years – which, if you are just starting out, you are not going to have. Instead, there are now specific business loans targeted at start-ups.

These government-backed personal loans are available to individuals looking to start or grow a business in the UK. They are unsecured, so there is no requirement to put forward any assets or guarantors, and they also come with 12 months of free mentoring.

Other funding options

As we have covered, there are plenty of funding options available to businesses in the UK. And it’s not just business loans. If you are looking for a bit of extra cash to support your business, maybe also consider a business credit card, overdraft, government grant or crowdfunding.

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