Small business loans: options, costs and what lenders look for

• Working capital gaps: paying suppliers and staff before customers pay you
• Growth: new premises, product lines, staff or markets
• Equipment and vehicles: assets that are expensive to buy outright
• Seasonal trading: building stock ahead of busy periods, or covering quiet months
• Tax bills and one-off costs: VAT, corporation tax, repairs or emergencies
• Refinancing: replacing more expensive debt

The lender assesses your business, agrees an amount and pays it to your business account. You repay in regular instalments over the term, covering capital and interest. Some products work differently: a revolving credit facility lets you draw and repay as needed, and a merchant cash advance is repaid as a share of card takings. The right structure depends on what the money is for and how your cash comes in.

There is no single rate for small business loans. Lenders price each application on your trading history, turnover, profitability, credit record, the amount, the term and any security. Terms range from a few months for short-term finance to several years for secured loans.

As well as interest, you may pay an arrangement fee and, with some lenders, early repayment charges. Compare offers on the total amount repayable.

To compare business loans fairly, work out the total repayable against the cash you actually receive, including fees.

Most UK small businesses with a year or two of trading, steady bank statements and repayments that fit comfortably within cash flow can qualify with some lender, although the choice narrows for newer firms or weaker credit. Lenders typically weigh up:

• Trading history: many lenders prefer at least one to two years of accounts; newer firms have fewer, more specialist options
• Turnover and cash flow: evidence the business can afford repayments, usually from bank statements and accounts
• Profitability: whether the business makes enough to service the debt
• Credit history: business and personal credit files; adverse credit narrows choice but does not always rule finance out
• Existing debt: how much you already owe and to whom
• Security and guarantees: property, assets or directors' personal guarantees, depending on the product
• Sector: some lenders specialise in particular industries, others avoid them, which is why the same application can be declined by one lender and approved by another

There is no set credit score that guarantees a loan. If you are just starting out, see start-up business loans; for the very smallest firms, our guide to micro business loans covers the options.

Bad credit and past refusals

A weaker credit history does not always rule you out. Some lenders focus on current trading and bank statements, although pricing is usually higher. If you have been declined before, find out why, deal with any outstanding arrears, and make sure your accounts and bank statements tell a clear story before reapplying.

Security and personal guarantees

Small business loans are secured in one of two ways: on property or other assets, or, for unsecured lending, through a personal guarantee from the directors or owners. Most small business loans, especially unsecured ones, require a personal guarantee from the directors or owners. This makes you personally responsible if the business cannot repay. Directors can look at personal guarantee insurance from specialist insurers to cover part of that risk; we do not give insurance advice.

A small business loan typically takes from a few days to a few weeks, depending mainly on whether it is secured. Unsecured loans are the quickest: once a lender has bank statements, accounts and ID, a decision often follows within days, with funds soon after the agreement and guarantee are signed. Asset finance usually moves at a similar pace once there is a supplier invoice. Secured loans take longer, commonly four to eight weeks, because the lender instructs a valuation and solicitors deal with the legal charge. Government-backed lending can add some extra checks. The most common causes of delay are out-of-date management accounts, unexplained items on bank statements and missing ID, so having these ready shortens the process.

Lenders that specialise in very small sums can be quicker still: Little Business Loans aims to decide within 24 hours on loans up to £20,000.

A loan is not always the best answer, and the right alternative depends on what is causing the need. If cash is tied up in unpaid invoices, invoice finance releases it without adding a term loan. For a tax bill, VAT funding or a Time to Pay arrangement with HMRC can spread the cost. Equipment can be funded through asset finance, so the asset largely pays for itself over its working life. For short, irregular gaps, an overdraft or revolving credit may cost less than a fixed loan; our guide to overdrafts versus business loans compares them. Grants suit specific projects but are competitive and slow, as explained in business grants vs business loans.

Where the pressure comes from several existing repayments rather than a new need, a small business debt consolidation loan may be the better route.