Small business owner standing outside her shop

What is a business loan?

If you’re looking for some additional funding for your small business, then a loan is often the quickest and most straightforward route. A business loan is when you borrow finances from a bank or funding pot, similar to personal borrowing. A business loan is specifically designed for commercial organisations (or some not for profits) and can be secured or unsecured – which we’ll explain later.

Large economic changes like those caused by Covid-19 are unlikely to happen every year. However, the choice of business loans available are wider than ever before and can be used to help navigate businesses through challenging times, or to move forward with planned growth. For example, prior to the pandemic, the Government-backed a startup loan scheme which you may qualify for if you’re just starting out and are taking out a first-time business loan.

It can be a confusing and sometimes overwhelming decision to know which small business loan to choose and how to apply. In this article, we hope to offer a clear introduction to the topic.

Getting a loan for a small business: doing the research

When you start your search for the right business loan there are a few questions that you should ask yourself first.

How much do you want to borrow?

Generally, the larger the amount borrowed, the more difficult it will be to find a lender. By looking to borrow the minimum amount that you need, you’re more likely to get a positive lending decision. Borrowing a smaller amount will also lead to more manageable repayments.

How long do you need to pay the loan back?

Refer to your projected cash flow to help you decide what type of repayment terms you’ll need. If you want to pay the loan back over a very short period of time, traditional lenders may not always offer the terms you’re looking for. Check the interest rates for different term lengths to ensure that you choose the one that works out best for your business. Also, be aware that many short-term loans may require you to agree to a ‘personal guarantee’, which makes the business owner liable for paying back outstanding funds if the business misses any payments.

How fast do you need the money?

Many lenders now have loans available which can offer funds within hours – but it’s not a standard practice. Applying for a loan needs to be a carefully considered process, so assess all options and plan in advance to avoid disappointment.

Are you prepared to offer security?

  • Secured loans: a tangible asset such as a property is used as security for the lender so that if you fail to pay back the debt, the lender can sell the asset to make back their money
  • Unsecured loans: you can borrow the money without the need to provide an asset, making it less risky for your business

Most lenders will offer both unsecured and secured loans. If you’re struggling with a poor business credit score, it’s much harder to get an unsecured loan – however, be sure you have assessed all of the risks and consequences associated with secured loans if you do choose to go down this route.

Check and improve your business credit score

Find out more

Getting a business loan with bad credit

More options are available to you when applying for a business loan if you have a good business credit score. This score is separate from your personal credit score, but in certain circumstances, this will be checked too – for example, if you’re a start-up with no prior business credit history. The better your business credit score is, the more likely you are to find a loan for your business and be offered more favourable interest rates. It will also reduce the risk of being personally liable for any repayments or needing to secure the loan with tangible assets.

A lender will run a credit search on your business as part of the application process – always check your own business score first so that you’re aware of any challenges that might arise or cause the process to take longer.

Tools such as My Business Profile can help with this. We’ll also give you help and support if it’s lower than you were hoping. Learn more about what a business credit score is and how you can improve it in our blog.

If you take these steps and learn that you have a poor score, there are options available to you. Your choices will be fewer but may still vary considerably depending on the lender. Extra measures such as offering a personal guarantee, or simply choosing a secured loan may be needed for a lender to agree to a loan.

Our blog outlines some steps you can take to achieve and maintain a good business credit score. These include:

  • Sharing your company’s information so Credit Reference Agencies can validate the data;
  • Checking the credit score of your clients and suppliers to minimise any risky partnerships; and
  • Ensuring you pay suppliers on time

Should I get a small business loan?

This will depend on your unique business circumstances – the reason you want the loan, your current financial position and ability to make your payments.

There are other funding options available such as crowdfunding, alternative business loans and peer to peer loans.

A business loan can have lots of benefits, but it might not always be the best choice for you. However, if you’ve done your research, believe that a loan is what you need to grow or stabilise your business and that you will be comfortable with the repayments, then there is no reason why a business loan wouldn’t be a great option.