SME loans: finance for small and medium-sized businesses by sector

There is no single legal definition. Government statistics and many lenders use headcount as the main test:

• Micro businesses: fewer than 10 employees (see our guide to micro business loans)
• Small businesses: fewer than 50 employees
• Medium-sized businesses: fewer than 250 employees

Other definitions add turnover and balance sheet limits, and the Companies Act sets its own thresholds for accounts and audit purposes. Lenders and government schemes may apply their own criteria, so check the definition that applies to the product you want. Businesses above these thresholds have different options; see finance for large businesses.

• Buying equipment or vehicles? Asset finance usually fits best, because the asset secures the agreement.
• Waiting for customers to pay? Invoice finance or a revolving facility matches funding to the gap.
• Taking card payments every day? A merchant cash advance flexes with takings, though compare the total cost.
• Funding a one-off project? A term loan, secured or unsecured, gives a fixed repayment plan.
• Facing a tax bill? A VAT or tax loan spreads the payment without draining working capital.

Most UK-registered SMEs that are trading, can show affordable repayments through their bank statements and accounts, and have a reasonable credit record for the business and its owners can qualify for some form of SME loan, although the product and the lender will depend on their sector and age.

We work with limited companies, LLPs, partnerships and sole traders registered and trading in the UK. Each lender sets its own criteria, but most look at:

• Trading history: many lenders prefer a year or more of filed accounts; some consider younger businesses
• Turnover and affordability: shown through bank statements and accounts
• Profitability and cash flow: whether the business can comfortably service the repayments
• Credit history: of the business and its directors or owners
• Existing borrowing: and how it is being repaid
• Security: property, assets or personal guarantees, depending on the product
• Purpose: a clear reason for the funding and how it will be repaid

Finance of £25,000 or less to sole traders and small partnerships can be regulated consumer credit, which gives you additional protections.

SME lenders usually take one or more of three things: a personal guarantee from the directors or owners, a debenture over the company, or a charge over a specific asset such as property, equipment or the sales ledger.

Unsecured loans and tax funding generally rest on a guarantee alone, while asset finance and invoice finance are secured on the equipment or invoices being funded, often backed by a guarantee as well. Larger term loans and revolving facilities frequently add a debenture, registered at Companies House, which can make a later lender ask the first for consent. If you prefer not to give a guarantee, see business loans without a personal guarantee; our guide to debentures and fixed and floating charges explains how company security works.

The Growth Guarantee Scheme, delivered by the British Business Bank through accredited lenders, gives lenders a partial government guarantee on eligible facilities for smaller businesses. The borrower remains fully liable for the debt. Check the British Business Bank for current availability and which lenders take part.

If a loan is not the right answer, SMEs can often fund a need through grants, investors, HMRC payment plans or by releasing cash already tied up in the business.

• Grants suit specific projects but are competitive and often need match funding; our guide to business grants versus business loans compares them.
• Equity investment brings in capital without repayments in return for a share of ownership, as explained in our guide to debt versus equity funding.
• For tax bills, HMRC may agree Time to Pay.
• Asset refinancing or asset-based lending releases cash from equipment, stock or debtors you already have.