Types of business loans in the UK compared

The main types of business loan in the UK are unsecured loans, secured loans, asset finance, invoice finance, merchant cash advances, revolving credit and overdrafts, short-term and long-term loans, property and bridging finance, and government-backed lending. Each is built for a different job, so the right one depends on what the money is for, how quickly you can repay it and what security you can offer. This guide compares them side by side and shows how to pick between them.

Smart Funding Solutions is a whole-of-market broker, not a lender, so we compare these products across a panel of 300+ lenders rather than selling one of them. For a shorter overview of every product we arrange, see our business finance page.

01Types of business loan at a glance

Type	How it works	Typically used for	Main trade-off
Unsecured loan	Lump sum in fixed instalments, no property security; personal guarantee often required	Growth, stock, marketing, working capital	Higher cost, smaller amounts
Secured loan	Lump sum secured against property or other assets	Larger or longer-term borrowing	Asset at risk; slower to arrange
Asset finance	Hire purchase or leasing, with the asset as security	Vehicles, machinery, equipment, technology	Tied to a specific asset
Invoice finance	Advance against unpaid customer invoices	Bridging the wait for customers to pay	Only for B2B sales on credit terms
Merchant cash advance	Advance repaid as a percentage of card takings	Retail and hospitality with steady card sales	Often costs more than a term loan
Revolving credit or overdraft	Draw and repay as needed up to a limit	Fluctuating cash flow, seasonal costs	Limits can be reviewed or reduced
Bridging and property finance	Short- or long-term borrowing secured on property	Buying, refurbishing or developing property	Bridging is expensive and needs a clear exit
Government-backed lending	Commercial loans with a partial government guarantee to the lender	Businesses short of security	Borrower stays fully liable; availability varies

02Unsecured business loans

Unsecured business loans don't require property or specific assets as security, which makes them quicker to arrange. Lenders rely on trading performance, bank statements and credit history, and directors are usually asked for a personal guarantee. Rates tend to be higher and terms shorter than secured borrowing.

03Secured business loans

Secured loans are backed by property, land or other valuable assets. Because the lender can recover the debt from the security, it may offer larger amounts, longer terms and lower rates. The asset is at risk if repayments are not met, and valuations and legal work add time and cost. Our secured vs unsecured business loans guide compares the two in detail.

Unsecured business loans don't require property or specific assets as security, which makes them quicker to arrange.

04Asset finance

Asset finance spreads the cost of equipment, vehicles or machinery over its working life. With hire purchase you own the asset after the final payment; with leasing you pay to use it and may return, extend or upgrade at the end. The asset acts as security, so it can be easier to obtain than a general loan and keeps cash free for running costs.

05Invoice finance

Invoice finance releases most of the value of unpaid invoices soon after you raise them, with the balance (less fees) paid when your customer settles. Factoring includes credit control by the provider; invoice discounting leaves collections with you and is usually confidential. It suits businesses that sell to other businesses on credit terms.

06Merchant cash advance

A merchant cash advance provides a lump sum repaid through an agreed share of future card takings. Repayments rise and fall with sales, which helps in quieter months, but the total cost can be higher than a term loan, so compare the full amount repayable.

07Revolving credit and overdrafts

Revolving credit facilities and overdrafts let you borrow up to an agreed limit, repay and borrow again. You pay interest only on what you use, which suits uneven cash flow rather than one-off investments.

£150,000A transaction we arranged£150K requirement. Two repayment structures. One solution.We split the facility: £78,000 repaid over five years and £72,000 interest-only, so repayments fitted how the business runs.

08Short-term and long-term loans

Short-term loans are usually repaid within a year or two and suit immediate needs such as stock, a tax bill or a short-lived opportunity. Long-term loans spread repayments over several years for larger investments. Longer terms reduce monthly repayments but increase the total interest paid; see short term vs long term business loans.

09Property, bridging and specialist finance

Commercial mortgages fund the purchase of business premises. Bridging loans provide short-term property-secured funding, for example to buy before a sale completes or to refurbish. Specialist business finance also exists for VAT and tax bills, acquisitions and management buyouts, and particular sectors.

10Government-backed lending

Government-backed business lending is delivered by the British Business Bank through accredited lenders. The Growth Guarantee Scheme gives accredited lenders a partial government guarantee on eligible loans, while the borrower remains fully liable for the debt. The Start Up Loans programme offers personal loans for business purposes to the founders of new businesses. Check the British Business Bank for current availability.

11How to choose the right type of business loan

1. Define the purpose: be specific about the amount, what it is for and how long you need it.
2. Match the term to the life of what you are funding: long-life assets over longer terms, short-term needs with short-term finance.
3. Check affordability: make sure repayments fit your cash flow in your quietest month, not your average one.
4. Compare the total cost: lenders quote annual rates, APRs, flat rates and factor rates, so compare the total amount repayable including fees and early repayment charges. Our guide to business loan interest rates explains each.
5. Decide on security: weigh the risk to an asset against a personal guarantee.
6. Check flexibility: can you overpay or settle early, and can repayments follow a seasonal pattern?
7. Read the terms: look closely at default clauses, covenants and early settlement terms.

12Common mismatches to avoid

• Funding a five-year investment with a six-month loan, which forces refinancing at a bad moment
• Using a merchant cash advance for a long-term project, when a term loan would cost less
• Taking a lump sum for irregular costs, when a revolving facility would mean paying interest only on what you use
• Putting equipment on an unsecured loan, when asset finance would keep that credit line free
• Stretching a short-term need over a long term and paying far more interest than needed

13What lenders look at, whatever the type

• Trading history, turnover and profitability
• Business bank statements and cash flow
• Business and personal credit history, including any CCJs or defaults
• Existing borrowing and the affordability of new repayments
• Security or personal guarantees available
• A clear purpose and, for larger or newer businesses, a business plan and forecasts

To explore funding options for your own business, you can apply online and we will set out which types fit and which lenders to approach; lenders make every final decision.