What is a small business loan?

A small business loan is a form of finance aimed to help businesses access additional funding.

There are a wide range of unsecured small business loans available and choosing the right one for your company and borrowing needs is extremely important.

Are small business loans secured or unsecured?

Loans can be taken on either a secured or unsecured basis.

Unsecured loans do not use security such as land, property or other tangible assets as collateral, while secured loans do. Both types of loans have their own pros and cons, read more about secured vs unsecured loans.

Your borrowing needs, financial status, access to assets and credit status will help determine which type of loan you are best suited to.

When applying for any type of loan, lenders will carry out an affordability assessment. The amount you can borrow is dependent on this, in addition to your credit worthiness.

Affordability assessments will look at:

  • Personal credit rating
  • Business bank accounts
  • Business financial reports
  • What the funds will be used for and how they will benefit your business - it is important to consider this when applying for an unsecured small business loan

Credit worthiness assessments will look at:

  • How long a company has been established
  • Company financial accounts for the finance year end and management accounts in some cases
  • Company bank statements in order to assess serviceability
  • Existing credit agreements (if any)
  • Company directors/owners/partners personal profiles

If you are applying for secured finance, the amount of equity you have available will also be a deciding factor.

When using secured finance, loans are secured against company assets or if you are a sole trader, these assets can also be of the personal nature.

Find out more about what can be used as security when applying for a secured loan.

How does a small business loan work?

For those with limited experience of business loans and applications, choosing the right lender, the best facility in terms of rates/fees and repayment amounts is not easy.

With such a wide range of small business funding types and providers available, many business owners settle for traditional high street banks, the brands they are aware of, without realising they may get a better deal elsewhere. Therefore, it is so important to research lenders and your options.

When you have an idea of who you would like to apply with, or you have used a broker's services, you will need to supply the following documents to support your application:

  • Company Accounts
  • Company bank statements
  • Personal net worth statements
  • Management accounts
  • Rationale on what the loan is for and how it will benefit the business

Once you have submitted the required information, the lender will carry out all the required checks and make a decision on the facility. If your application is successful there can be conditions attached to the acceptance which will need to be satisfied before the loan can be drawn down.

If you have applied for a secured loan, the lender will also carry out a valuation of the assets to calculate your maximum borrowing amounts.

Is a small business loan right for you?

Deciding on the best business loan for your company can difficult and there are several things you must consider.

You must evaluate:

  • Rates/Interest - How much will the finance facility cost you in full
  • Fees - What fees are involved
  • Loan amounts - How much funding does your business need
  • Repayment schedules - Short term business loans or long terms
  • Impact on financial health - Will the loan have a positive impact on long term health

The most important thing to bear in mind is to remember is how the loan is going to be of benefit to your business. This can sometime be more important that how much the loan actually costs.

There are a wide range of lenders offering business loans and knowing which lender to approach is the most important step in acquiring business finance.

  • Do your research - what lenders specialise in your type of business and finance requirements.
  • Do not go "application mad" and apply with every lender you can find as this can impact your credit score and in some cases your ability to get funding.
  • Read all documentation thoroughly to make sure you are making informed decisions. Speak to a solicitor to and get Independent Legal Advice if you feel this is necessary.
  • Consider using a finance broker as the right finance broker will have access to lenders and special facilities that you may not get directly.

You can then use the above information to help you decide whether an unsecured small business loan, or a particular loan offer is the best fit for you.

How can I use a small business loan?

an unsecured small business loan can be used for virtually any business use, providing it is appropriate and justifiable to a lender.

As there are such a wide range of uses, most lenders have categorised loan types to streamline the application process.

The main types of business loans available are:

How much could I borrow?

The actual amount will be determined based on your affordability assessment and credit worthiness as well as existing finance agreements, company profits company financial health and trading time.

There are several other variables and reasons that could determine a decision by an underwriter.

With secured lending the amount you can borrow is also limited by the amount of equity you have available in most cases.

These are just examples of how amounts can be calculated and are not a definitive guide.

For start-ups or companies that have been trading less than 12 months, how much you can borrow is significantly lower than well-established and profitable companies.

You may be eligible for vast sums of cash but being able to afford your repayments should be the deciding factor when taking on a loan.

Does my business qualify?

Getting an unsecured small business loan has become easier with the rise of alterative finance providers in addition to traditional lenders.

Development of online application services has sped up applications as you no longer need to have face to face meetings with lenders or bank managers.

For many, traditional bank loans have become increasingly difficult to get, and the emergence alternative finance providers entering the market has given companies in the UK more options when applying for external finance.

Small businesses can find it harder to gain funding in comparison to large corporations. This can be due to a shorter trading history or other factors such as less detailed accounts, with many filing micro-accounts. Luckily, there are many alternative lenders that specialise in unsecured small business loans for companies of any size.

Most lenders will have an appetite to lend to companies that:

  • Are profitable
  • Have been trading more than 12 months
  • Are financially stable
  • Pass affordability checks
  • Have a Bonafede need for funding in order for their business to grow

If you feel your company passes the above, then you may be eligible to apply for business finance.

Updated: July 05, 2021