Business loans: how to compare and apply

Work out what the finance must achieve

Write down the amount, purpose, timing and expected commercial return before approaching a lender. Equipment with a long useful life, a short seasonal stock purchase and an ongoing cash-flow deficit should not automatically be financed in the same way.

Build a monthly cash-flow forecast that includes tax, existing debt and a weaker-than-expected sales case.

The affordable payment is not the maximum a lender offers; it is the amount the business can meet while still paying staff, suppliers and essential overheads.

Types of business loan and finance

A term loan provides a lump sum repaid over an agreed period. A revolving facility or overdraft can be drawn and repaid for shorter needs.

Asset finance links funding to equipment, invoice finance releases part of unpaid invoices, and asset-based lending may use several business assets.

Start Up Loans are government-backed personal loans for eligible founders starting or growing a young UK business.

Peer-to-peer and marketplace models may connect borrowers with institutional or individual capital, although the legal lender and servicing arrangement vary by platform.

Business loan eligibility

Lenders commonly assess trading history, turnover, profitability, cash generation, existing commitments, credit history, sector, ownership and the purpose of the borrowing.

Newer businesses may be assessed more heavily on the founders, plan and personal credit profile.

Prepare recent accounts, management figures, bank statements, tax information, forecasts and details of existing borrowing. A clear explanation of how the loan creates or protects cash flow makes the application easier to evaluate.

• Check personal and business credit reports for errors
• Reconcile accounts and explain exceptional transactions
• State the use of funds and expected payback clearly
• Provide realistic forecasts with assumptions
• List existing debt, security and personal guarantees
• Avoid making several speculative applications at once

How to compare business loans

Compare offers on the same amount and term. Include interest, arrangement, broker, legal, valuation and monitoring fees.

Check whether fees are deducted from the advance, paid upfront or added to the balance, because that changes the cash received and total repaid.

Read the repayment frequency, early settlement rules, default interest, covenants, security and guarantee documents. Ask whether the lender reports to credit agencies and what happens if a payment date needs to change.

Advantages and risks

Debt lets owners finance an investment without selling equity and can provide a known repayment schedule. Used well, it can bring forward equipment, stock, premises or capacity that generates more value than the borrowing costs.

The central risk is that repayments continue when sales disappoint. Security can be enforced, guarantees can expose personal assets and restrictive covenants may limit decisions.

Short terms reduce the interest period but create larger payments; long terms lower individual payments but can increase total cost.

Alternatives to a conventional loan

An overdraft, credit card or trade credit may suit a small short-term gap. Asset finance can match payments to equipment use.

Invoice finance can support growth where cash is tied up in trade debtors. Equity or crowdfunding avoids scheduled debt repayment but can dilute ownership or require rewards and disclosure.

Grants and government support can help with qualifying projects, but eligibility is narrow and timing uncertain. Retained profit and staged investment are often the cheapest funding, although they may slow the plan.

Compare the commercial consequences, not simply whether the money is called a loan.

Applying safely

Verify the firm and any broker through official registers. Understand who receives a commission and whether the broker searches the whole market or a panel.

Never pay an unexpected fee to release an approved loan, and be cautious of pressure to act before seeing the agreement.

A regulated status can depend on the product and borrower; not all business lending is FCA-regulated. Legal, tax or financial advice may be appropriate for significant security or personal guarantees.