Choosing the right type of business finance is one of the most important decisions you will make as a business owner. This guide covers every major loan type available in the UK, who each one suits, and how to find the best deal.
The UK business lending market has expanded significantly over the past decade. Beyond traditional high-street bank loans, there are now dozens of specialist lenders, challenger banks, and alternative finance providers competing for your business. Each product works differently, suits different situations, and comes with different costs. Picking the wrong type of finance can mean paying more than you need to, or worse, taking on a facility that does not fit your cash flow pattern.
Working with a business finance broker can help you navigate these options efficiently. A broker compares the whole market and matches you with the lender most likely to approve your application on the best terms.
A term loan is a lump sum borrowed from a lender and repaid in fixed monthly instalments over an agreed period, typically one to five years for unsecured loans and up to 25 years for secured loans. Interest can be fixed or variable.
Term loans suit businesses that need a specific amount of capital for a defined purpose, such as buying equipment, fitting out premises, or funding an expansion project. Lenders typically want to see at least two years of trading history and evidence that the business can comfortably afford the repayments from existing cash flow.
A business overdraft lets you borrow up to an agreed limit through your business current account. You only pay interest on the amount you actually use, making it a flexible option for managing day-to-day cash flow fluctuations. Overdrafts are technically repayable on demand, meaning the bank can ask you to repay the full amount at any time, although this rarely happens without warning.
Overdrafts work best for covering short-term gaps, such as when you are waiting for customer payments to arrive. They are not ideal for funding long-term investments because the interest rates tend to be higher than term loans and the facility can be withdrawn.
If your business invoices other businesses on credit terms (30, 60, or 90 days), invoice finance lets you access up to 90% of the invoice value immediately, rather than waiting for your customer to pay. There are two main types:
Invoice finance is particularly useful for fast-growing businesses where cash is constantly tied up in receivables. It scales naturally with your turnover: the more you invoice, the more funding is available.
Asset finance lets you acquire vehicles, machinery, technology, or equipment without paying the full cost upfront. The two main structures are hire purchase (where you own the asset at the end of the agreement) and leasing (where you return it or upgrade). Monthly payments are spread over the useful life of the asset, typically two to seven years.
Because the asset itself acts as security, approval rates for asset finance are generally higher than for unsecured loans. There are also significant tax advantages: capital allowances on hire purchase and full expense deductions on lease payments.
A merchant cash advance provides a lump sum that is repaid automatically through a percentage of your future card transactions. There are no fixed monthly repayments. Instead, if sales are strong you repay faster, and if sales slow down the repayments reduce proportionally.
This structure suits businesses with strong card-based revenue, such as retail shops, restaurants, and pubs. However, the total cost of a merchant cash advance is often higher than a traditional loan, so it is important to compare the factor rate carefully before committing.
The UK government supports small business lending through several schemes. The British Business Bank guarantees a portion of loans made by accredited lenders, reducing the risk for the lender and making it easier for businesses that might otherwise be declined to access finance.
A bridging loan is a short-term facility secured against property, typically lasting 1 to 24 months. Businesses use bridging finance to fund property purchases at auction, cover cash flow gaps while waiting for longer-term finance to complete, or fund refurbishment projects. Interest rates are higher than conventional loans (typically 0.5% to 1.5% per month), but the speed of funding — sometimes within days — makes bridging finance invaluable when timing is critical.
Secured loans require you to put up an asset (usually property) as collateral. If you default on the loan, the lender can sell the asset to recover their money. Because the lender's risk is lower, secured loans typically offer higher borrowing limits, longer terms, and lower interest rates. They suit larger borrowing requirements and businesses with property or high-value assets available as security.
Unsecured loans do not require specific collateral, although many lenders ask for a personal guarantee from the business owner. This means you are personally liable for the debt if the business cannot repay. Unsecured loans are faster to arrange and require less paperwork, but the amounts tend to be smaller and the interest rates higher.
The right loan depends on several factors:
A business finance broker saves you time and often money. Instead of approaching lenders individually, a broker assesses your situation and matches you with the lenders most likely to approve your application on competitive terms. Good brokers have access to lenders you cannot approach directly, including specialist and institutional funders.
Nesto matches you with an experienced, FCA-regulated business finance broker for free. There is no obligation, and the broker works on your behalf to find the best deal available. Get Matched Free to speak with a specialist today.
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