A guide to business loans for small businesses

3 Jul 2020

However large or small, every business needs adequate cash flow to operate well. Business loans for small businesses can provide companies with the financial help they need in a flexible format. This article looks at the most common types of small business loans and what they’re typically used for.

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What is a small business loan?

A small business loan is a type of finance that enables businesses to fund an aspect of their operations or growth. In times of difficulty, it can provide a critical lifeline for companies, as we've seen through the popularity of the government's coronavirus loans for SMEs

Providing it meets the eligibility criteria, a business can borrow money from a lender. In doing so, it must agree to the lender's repayment terms. The loan amount is then paid back with interest in monthly repayments over a period as outlined in the terms. 

What do small businesses use loans for?

Businesses borrow money for several reasons. As small business loans are typically borrowed over the short term, they are often used to boost working capital or invest in necessary equipment/inventory. However, businesses can also use loans to help facilitate an expansion.

1. Expand operations 

If your business is turning a profit, has a healthy cash flow and has an optimistic forecast, you might decide to expand. An expansion could involve purchasing larger premises or hiring new employees, which can be expensive. A loan for small businesses can give you the financial boost you need to make it happen. 

2. Purchase equipment 

Business loans for small businesses can also help you finance the equipment you need to improve business operations and productivity. 

3. Purchase more inventory

Similarly, a business loan can give you the funds to purchase the goods/services you need to generate revenue.

4. Increase Working Capital 

You might decide to take out a business loan to boost your company's working capital. Working capital is the money used in a business's everyday operations and calculated as current assets minus current liabilities. Working capital loans can be unsecured or secured and designed with flexibility. 

What are the different types of business loans? 

Business loans for small businesses come in various shapes, sizes and guises. Some lenders offer loans specifically for small businesses, while others specialise in fast loansshort-term loans or loans for bad credit. Business loans can fall into the following categories:

Secured loans 

secured business loan is based on your business's assets, such as property, vehicles, or equipment. This type of loan might be a suitable option if you don't want to offer a personal guarantee. Essentially, if you don't repay the loan, the lender is entitled to sell the assets to reclaim their owed money. 

Unsecured loans

You don't have to offer security with an unsecured business loan, making it a potentially suitable option if your business doesn't own many assets. 

Business owners who don't want to offer security or need the finance quickly might also go down the unsecured route. The lender will consider your trading history and may require a personal guarantee. 

Read our guide below to understand better the difference between secured and unsecured business loans and which your business might be better suited to.

Secured vs Unsecured Loans

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Where can I apply for a small business loan?

There are many lenders today, each with their eligibility criteria, interest rates and T&Cs. Funding Options is the UK's leading marketplace for business finance – you can use our platform to compare lenders and see the finance options you may be eligible for. 

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1. High street banks

Major banks will likely look for a strong balance sheet, security and a lengthy trading history before offering you a loan. Interest rates can be lower, but many firms find they aren't eligible for high street bank finance.

Funding Options is part of the Bank Referral Scheme that HM Treasury set up to help businesses unsuccessful with the bigger banks access funding. 

2. Challenger banks 

Challenger banks tend to offer similar products to high street banks but are more flexible regarding their lending criteria. As such, challenger bank loans can be more accessible and quicker to access, but they can still be slow in some cases.

3. Independent lenders

Large independent lenders are at the helm of the alternative finance space. Alt lenders can usually lend to wider businesses as they don't have the same restrictions as central banks. However, they can be more expensive.

4. Small specialists

Specialist/ niche alternative lenders typically focus on one or two lending types and often specialise in a specific sector. Many provide a speedy application process, and the costs can vary significantly depending on the lender.

Instead of operating a "catch-all" criteria, specialist lenders tend to be more flexible and take each application on a case by case basis.

Small business loans for COVID-19

A range of business support measures, including loans and grants, are available to businesses that have been adversely affected by the coronavirus pandemic, such as the Recovery Loan Scheme. The RLS aims to provide SMEs with access to finance to succeed and grow through the post-pandemic economic recovery through government-backed loans ranging from £1,000 to £2M. Visit our coronavirus business hub for more information and to find out more. 

Why choose Funding Options for a small business loan?

At Funding Options, we’re dismantling business funding barriers by providing business owners like you with quick and easy access to finance. Our Funding Cloud technology validates your business profile and matches you with the funding industry’s largest lender network.

What’s more, our dedicated Business Finance Experts are on hand to help you through the whole process, from application to money in the bank. So, don’t delay; kickstart those growth plans with business funding today!

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Stuart Lawson

Chief Commercial Officer

Stuart is Chief Commercial Officer at Funding Options where he plays a key role in driving the growth of the business and its relationships with more than 120 partners. A finance industry veteran, he has a strong background in alternative finance, corporate and commercial banking, as well as global transaction banking.

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