What is a small business loan and how can I get it?

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  • Borrow from £1,000 to £200,000 over 12 months
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Are you looking for finance for your small business? Does your business need funding to help with cash-flow problems, operating costs or expansion. If so then a small business loan might be suitable for you. Lenders offer various types of small business loan and all they suit different businesses and situations.

In this guide we explain how small business loans work, how to apply and the pros and cons. We also answer common questions like “how much can I borrow?” and “what if I have a bad credit rating?” Let’s take a look in more detail.

Table of Contents

What is a small business loan?

A small business loan is an umbrella term for any lending to small businesses. It includes simple unsecured loans, secured asset financing, invoice financing and commercial mortgages.

Small business loans are used by small business for a variety of purposes including buying assets, helping with cash-flow issues and paying for expansion.

How does a small business loan work?

Small business loans work differently depending on the type of loan.

Unsecured small business loans work a bit like a personal loan. Your business borrows cash from the lender and repays the loan, with interest added, over an agreed period. Lenders often charge higher interest rates for unsecured small business loans because they are taking on the risk that they won’t be repaid.

Secured small business loans include asset financing, invoice financing and commercial mortgages. Interest rates tend to be slightly lower than unsecured lending. Your assets are at risk if you don’t keep up repayments.

What can I use a small business loan for?

A small business loan can be used for various purposes including helping with cash-flow issues, buying assets or funding day-to-day operations. They are particularly useful to help with the following:

  • Seasonal business - some businesses apply for a loan to pay wages and suppliers during quiet sales periods. This loan can be repaid later when cash comes in from selling stock to customers.
  • Awaiting payment- new businesses sometimes need to offer generous payment terms to customers. This can lead to cash-flow problems if customers have longer payment terms than suppliers.
  • Buying an asset - your business can spread the cost of an asset over its useful life.
  • Cash-flow buffer - some business owners prefer to have a cash buffer to minimize cash-flow risks.
  • Tax or other unexpected bill - tax bills have strict repayment deadlines and you may need to borrow to pay your business’s bill.
  • Refurbishment - if your business needs to refurbish a new office or other business premises then a small business loan could provide short-term finance and help spread the cost.
  • Marketing - new businesses may need to spend cash on marketing their products or services before they have had time to build up a cash buffer.

Types of small business loan

Lenders offer various types of small business loan and they each suit different circumstances. Here are some of the most common types of small business loan:

  • Unsecured short-term loan - a simple type of small business loan that is usually repaid over 3 months – 3 years.
  • Unsecured long-term loan - similar to a short-term loan but the term of the loan is more than 3 years. Some lenders only accept applications from business with at least two years’ trading history.
  • Asset financing – a secured loan to buy an asset that is usually repaid over the useful life of the asset. Your business may or may not own the asset at the end of the loan period depending on the type of asset finance.
  • Invoice financing – lenders agree a loan based on the value of your unpaid customer invoices. Some lenders will advance up to 75- 90% of the value of your invoice book.
  • Working capital loan - a short-term business loan to finance day-to-day operations.
  • Line of credit - this type of working capital loan works a bit like a bank overdraft. The lender agrees an upper lending limit and your business can borrow and repay amounts up to this amount. You don’t have to borrow the full loan amount and there are no early repayment penalties.
  • Commercial mortgage – a long-term secured loan to purchase your own business premises or a commercial rental property. Short-term loans are also available for property developers.
  • Merchant cash advance - a type of short term loan for businesses that use a card terminal for customer payments. Your business repays the loan with customers’ card payments.
  • Recovery loan scheme - a Government-backed loan scheme for businesses that have been affected by Coronavirus.

What are the pros & cons of a small business loan?

The pros and cons of a small business loan depend on the type of loan your business is applying for. Here is a summary of some of the pros and cons for the most simple type of small business loan—a short-term unsecured small business loan:


  • Quick - once you apply, you may get a decision within 24 hours.
  • May be flexible - some lenders offer flexible draw-down and repayment options. This means you can add to or repay your business loan without needing to reapply.
  • Short-term - short term business loans are available for between 3 months - 3 years. You may prefer a short-term loan to help with cash-flow issues rather than committing to a long-term loan.
  • Not secured - some loans are unsecured on assets. This means that your assets won’t be at risk if you don’t keep up repayments.
  • Free software - some lenders provide free software to business loan customers. This can help you to manage your business cash flow
  • Safer than a personal loan - while in some cases a business owner can use a personal loan to help fund their business, a small business loan won't affect the


  • Expensive - some types of loan, particularly short-term and unsecured loans, charge high rates of interest.
  • Not for large-scale borrowing - many lenders will only accept loan applications of up to £50,000. Othere lenders will consider loans of up to £250,000. This may not be enough if you are funding a large-scale expansion for your business.
  • Not suitable for long-term borrowing - some loans are more suitable for longer-term borrowing. For example, asset financing is often spread over the useful life of an asset.
  • Affects credit score - when you apply, the lender will run credit checks on you or your business. If they refuse your application then this will have a negative impact on your credit rating.
  • New businesses might have more trouble finding a loan - some small business lenders impose minimum turnover requirements that new companies might not be able to meet. (As an alternative, in some cases a personal loan can be used for business purposes if a new business or one with low turnover can't find a loan.)

How do I apply for a small business loan?

Small business loans are available from banks, brokers and specialist lenders. Your business can apply online or over the phone.

Lenders will assess your application based on their eligibility criteria. They will also run a business or personal credit check before deciding whether to lend to your business. Here is some other information they may require about your business:

  • Use of loan - lenders will ask how your business will use the loan.
  • Affordability - lenders often need information on regular financial commitments to assess if loan repayments will be affordable.
  • Financial statements or bank statements - you may be asked to provide finance statements or recent bank statements to the lender. They will use them to assess the financial health of your company.
  • Length of time in business - some lenders will lend to business that have been trading for over 3 months, whereas others only consider business with over 12 months’ trading history. If you own a new business then it is worth shopping around to find a lender for newer businesses.
  • Business plan - this varies between lenders and the type of loan. Some lenders want to see a detailed business plan whereas others only need business bank statements.
  • Personal guarantee - some lenders require a personal guarantee on loans over £250,000. This is means you will be personal liable if your business is unable to repay the loan.

Where can I get a small business loan?

Get a small business loan with Iwoca. Apply now.

Get started

  • Borrow from £1,000 to £200,000 over 12 months
  • Repay early with no fees
  • Decisions in 1 working day
  • Help from a dedicated account manager

Here is a list of some small business loan providers in the UK.

Frequently asked questions

How long your business can borrow depends on the type of small business loan. Lenders sometimes offer longer loan periods on secured loans to spread the cost over the useful life of the asset.

If you own a new company you may have fewer loan choices. Some lenders only offer short-term finance to newer businesses that have been trading for less than 12 months.

This depends on the type of small business loan. You will need security for asset or invoice financing and for a commercial mortgage. You may need to provide a personal guarantee if your business is borrowing a large amount of over £250,000.

Many lenders will let you perform a soft credit check to see if you are likely to be approved for a small business loan. This soft credit check won’t appear on your credit report so it won’t affect future applications.

If you have a bad credit rating it may be worth using a financial broker to apply for finance. They have experience applying for business loans and may be able to advise you on possible options if you have a bad credit rating.

How much your business can borrow will depend on the type of loan, your business’s financial health and if the loan is secured.

Lenders have different lending criteria and upper loan limits. Some lenders specialise in small business loans of up to £50,000 whereas other lenders consider loans of up to £500,000. If your business applies for secured lending then the loan value will be linked to the asset value. Some lenders will consider loans of up to £20 million on a commercial mortgage.

Interest rates and fees vary significantly between different types of loans and will be set out in your loan agreement. In general interest rates are lower on secured loans and loans with a longer repayment period. Read more in our study on average UK business loan interest rates.