Table of contents

  • Summary
  • Introduction
  • Common types of business loans
  • Consider these 5 factors
  • Access flexible funding with MarketFinance
  • Frequently asked questions (FAQs)

Summary

There is a seemingly endless list to choose from when it comes to securing a loan for your business. This article helps business owners make sense of these options to find the best form of finance for their business. First, we cover the most common business loans in the UK and explain which type of businesses they are the most suited for. Then, we note five important things to consider when deciding on the right business loan. We wrap up by answering some frequently asked questions to dispel any potential confusion.

Introduction

If you’ve ever tried to finance your business, you know there is no shortage of loans to choose from. From invoice financing to business credit cards, it’s easy to get overwhelmed by the abundance of options that are out there. However, with each loan serving a distinct purpose, and some being industry-specific, business owners need to understand their options fully before borrowing funds. That’s where we come in.

This article breaks down some common business loans currently available in the UK to dispel any potential confusion. Then, to help you determine the best type of funding for your business, we note some important considerations you should make when choosing a loan. By following our guidance, you'll be able to find the tool to fund the future of your business.

Common types of business loans

Traditional bank loans

Traditional business loans are forms of financing provided by mainstream banks and lenders. These loans typically offer affordable interest rates and are free from additional charges. However, alternative business funding has a much higher barrier to entry and often requires much more paperwork. Due to their high rejection rate, these types of loans are generally better suited to businesses with strong credit histories.

Working capital loans

When business owners lack working capital, they often struggle to cover important expenses like rent, staff wages, office supplies and utility costs. To help them front these costs, businesses can use working capital loans to finance their daily operations. It’s a temporary solution that could be suitable for smaller businesses dealing with fluctuating demand. However, due to its short-term nature, it shouldn’t be used to purchase assets or make big investments.

Invoice financing

Invoice financing is a unique funding solution that helps business owners free up cash from unpaid invoices. Often confused with invoice factoring—where businesses sell their unpaid invoices to factoring companies—invoice financing helps businesses get loans by using their invoices as collateral. This service is useful for businesses that want to quickly improve their cash flow by turning their unpaid invoices into capital.

Merchant cash advance

A merchant cash advance is a financial measure catered towards businesses that take debit and card payments. It offers business owners a lump sum of cash in exchange for a percentage of future card transactions. This type of loan can be a lifesaver for businesses with consistent card sales struggling to access finance elsewhere. However, due to its high borrowing costs, it can cause cash flow difficulties down the line.

Lines of credit

A line of credit is a type of revolving finance that provides businesses with access to cash up to a pre-agreed limit. Unlike many other loans, business owners are only required to pay interest on the money they've taken out. Due to its flexibility, this solution is best suited for ventures in need of temporary funds or dealing with unpredictable cash flows.

Business credit cards

Similarly to lines of credit, business credit cards provide enterprises with a specific amount of capital up to a fixed limit. However, with credit cards, businesses can borrow money and then pay their debts back into the account when it suits them. Aside from easing cash flow problems, business credit cards allow employees to report and track their expenses. However, their interest fees often exceed lines of credit.

Government-backed loans

As the name suggests, government-backed loans are a type of finance where the government guarantees a certain amount of the loan. Should the borrower default, the government will recover the losses. Due to this backing, this type of loan can feature more generous interest rates, making it suitable for smaller businesses or ventures dealing with fluctuating demand.

Equipment loans

For businesses that lack the capital to purchase business-related equipment, equipment loans help them cover these costs. Whether it’s kitchen supplies for hospitality venues or computer software for office-based businesses, these loans can cover an extremely wide range of machinery and technology. This option is great for businesses looking to invest in growth with useful equipment.

Consider these 5 factors

Now you’re aware of what funding options are available, here are some things to look out for when deciding which loan is best for you.

1. What's my business’s credit score?

You need to know your business's credit score no matter which loan you pursue. When lenders assess your eligibility for the loan, this is likely to be the first thing they'll check. So, to understand which funding options you qualify for, you must be aware of your business's credit score before applying.

Your credit score is also used to determine how much interest you’ll be charged and how much you can borrow. This means the conditions of your loan could differ significantly depending on your credit history.

If you aren't currently aware of your business's credit score, you can check it for free with sites like Experian and Credit Safe. Companies with strong credit scores may qualify for loans from banks and other traditional institutions. However, businesses with weaker credit scores still have a good chance of qualifying for alternative forms of finances.

2. Why do I need the loan?

Most loans are dependent on the individual circumstances of the business. Therefore, when figuring out the best type of finance for your business, you need to consider your reasons for needing it in the first place.

Do you need a quick cash flow injection? Are you looking to recover invoice payments? Do you need support buying business equipment? These are some questions you should ask yourself before searching for loans.

You should also reflect on how you take payments, how consistent the demand for your products and services are, and how long you expect to depend on the loan. You'll avoid options that don't cater to your needs by doing this.

3. How much can I afford?

Every business has a different budget. While some can afford to take out large loans with heavy interest and start-up charges, others will need to explore less pricey alternatives. Before you scan the market for solutions, you must establish firm limits on what you can afford.

We recommend figuring out how much your business can pay each month on loan repayments and interest charges. Once you have this figure, you can enter it into a loan calculator and gauge what type of finance will be in your means. This takes the guesswork out of borrowing and prevents you from encountering cash flow shortages down the line.

4. When can I afford to pay it back?

Different loans have different repayment periods. Short term loans normally need to be paid off within a year, while long term loans can last anywhere from 1 to 30 years. And other options, like merchant cash advances, consistently take cuts of your future sales.

If you can afford to pay your loan back early, short term loans are likely to be a more viable option for your business. By reducing the borrowing time, interest payments can be kept to a minimum, and it'll be easier to invest in other areas of your business.

Alternatively, if your business’s revenue isn’t expected to pick up for a long time coming, it may be more sensible to consider longer-term loans. This way, your business is less likely to be caught out by early payment deadlines.

5. Can I offer collateral?

Loans typically come in secured and unsecured forms. Secured loans are backed up by assets like commercial property, stock and machinery. Should borrowers stop making repayments, the lenders can seize the assets to recover the losses. On the other hand, unsecured loans are not guaranteed by any type of security. These loans are generally more straightforward, but they also charge higher interest rates to mitigate the risks.

If your business can offer collateral, your monthly repayments may be slightly more affordable. However, if you can't provide security, don't panic. Alternative lenders offer a wide range of affordable, unsecured loans that can be tailored to the needs of most businesses.

Access flexible funding with MarketFinance

Deciding on a business loan takes a lot of thought. By following the advice above, we hope your search for business funding can be made as simple as straightforward as possible.

If you're looking to secure a loan for your small business, MarketFinance may be able to help. From government-backed loans to invoice financing, we offer several measures that have been designed to help resolve your cash flow issues. For more information about our solutions and eligibility criteria, learn more here.

Frequently asked questions (FAQs)

What business loans are available in the UK?

Fortunately, UK businesses can access a range of different business loans. Some common examples include traditional bank loans, working capital loans, invoice financing, merchant cash advance, lines of credit, business credit cards, government-backed loans and equipment loans.

What should I consider when deciding on a business loan?

No business owner should jump into getting a business loan. Before deciding on the most suitable option for you and your business, you should consider your company's credit profile, why you're applying, how much interest you can afford, when you'll be able to pay it back, and if you need secured or unsecured financing.

Why should I know my business’s credit score?

When looking to secure funding, business owners need to be aware of their company's credit score. When lenders assess your eligibility for the loan and decide how much you'll be able to borrow, this is likely to be the first thing they'll check. So, to understand which funding options you qualify for, you must be aware of your business's credit score before applying.

What is invoice financing?

Invoice financing is a funding solution that helps business owners free up cash from unpaid invoices. Unlike invoice factoring, where businesses sell their unpaid invoices to factoring companies, invoice financing helps businesses receive loans by using their invoices as collateral. This service is useful for businesses that want to receive payments quickly from their unpaid invoices.

What are government-backed loans?

As the name suggests, government-backed loans are a type of loan where the government guarantees a certain amount of the loan. This means that should the borrower default; the government will step in to recover the losses. Because the loan is backed up in this way, government-backed finance often offers more attractive interest rates. This makes it suitable for smaller businesses or those dealing with fluctuating demand.