Micro business loans: finance options for very small firms

Definitions vary by purpose. The most common test is fewer than 10 employees. For company accounting, a micro-entity is also defined by turnover and balance sheet limits, and qualifying companies can file simplified accounts; check Companies House for the current thresholds. Lenders often use their own turnover-based definitions, so the label matters less than your figures.

• Cash flow: one late-paying customer or a quiet month can cause real strain, so rigid or oversized repayments are risky.
• Customer concentration: relying on one or two clients makes lenders more cautious.
• Credit record: a loan you repay reliably builds your history; one that stretches you can damage it and limit future options.
• Growth: repayments that absorb all spare cash leave nothing for equipment, staff or marketing.

Most micro businesses that have typically traded for at least six to twelve months, bank their income through a business account and have a reasonable personal credit record can qualify for some form of finance; brand-new firms are usually limited to start-up and asset-based options. Lenders typically look at:

• Recent business bank statements and how regular your income is
• The owner's personal credit history, which carries significant weight for small firms
• Tax returns or filed accounts
• Time trading and turnover
• Existing debts and commitments, and a clear purpose for the money

Sole traders and small partnerships borrowing £25,000 or less may be covered by consumer credit regulation, which brings affordability checks and additional protections. Keeping income in a dedicated business bank account makes it much easier for lenders to assess.

Most micro business finance is either unsecured or secured on what it pays for, but the owner's personal commitment matters more than in larger firms. Sole traders and partners are already personally liable for business debts, so lenders rely on their personal credit and income. Directors of small limited companies are usually asked for a personal guarantee, which makes them personally responsible if the company cannot repay. Asset finance is secured on the van or equipment itself, and invoice finance on the invoices funded. Property security is rarely needed for the amounts micro businesses usually borrow, though a lender may ask for it on a larger loan. Read our guide to personal guarantees before signing one.

A micro business loan typically takes from a few days to a couple of weeks, because the amounts are modest and lenders rely mainly on bank statements rather than detailed accounts. Short term and unsecured loans assessed through open banking are often the quickest. Asset finance usually follows once the supplier's quote or invoice is in. Selective invoice finance can take a little longer the first time, while the funder checks the customer and the invoice. Government-backed Start Up Loans involve a business plan and cash flow forecast, so allow several weeks. Sole traders borrowing smaller sums under consumer credit rules may also face fuller affordability checks. Mixing business and personal spending in one account is the most common cause of delay.

1. Be specific about what the money is for and for how long you need it.
2. Match the product to the need: short-term finance for short-term needs, asset finance for equipment.
3. Check repayments against your quietest month, not your average one.
4. Compare the total amount repayable, not just the rate.
5. Read the terms, including personal guarantees and early repayment charges.

If you are growing beyond micro size, our guide to small business loans covers the wider range of options.

Before taking on debt, a micro business can often free up cash in other ways. Chasing overdue invoices and asking for deposits or stage payments brings money in sooner; our guide to late payment and chasing invoices covers practical steps. If a tax bill is the problem, HMRC may agree a Time to Pay arrangement. Grants are worth checking for specific projects, though they are competitive and rarely cover day-to-day costs; see business grants vs business loans. Buying used equipment rather than new reduces the amount to fund. Sole traders who want to strengthen their position first may find our guide to rebuilding your financial standing useful.