What Is a Business Loan?
A business loan is a fixed amount of money borrowed from a lender that is repaid over an agreed period, typically with interest. The lender provides the capital upfront and you repay it in regular instalments, usually monthly, over a term that can range from a few months to several years.
Business loans can be secured or unsecured. A secured loan requires an asset such as property or equipment as collateral. An unsecured loan does not require security, though lenders may ask for a personal guarantee from a director instead.
Secured vs Unsecured Business Loans
The distinction between secured and unsecured lending matters both for how much you can borrow and what happens if you cannot repay.
Secured Business Loan
Backed by an asset such as commercial property, equipment, or stock. Because the lender has security to fall back on, you can typically borrow more at lower interest rates. However, the asset is at risk if you default.
Unsecured Business Loan
No asset is required as collateral. Lenders rely on the creditworthiness of the business and its directors. Rates tend to be higher, but the application process is faster and more accessible for most SMEs.
How Interest Works
Business loan interest is typically expressed as an annual percentage rate (APR) or a simple interest rate. The rate you receive will depend on your credit profile, trading history, loan amount, and the lender you use.
Some lenders, particularly alternative and specialist lenders, use a factor rate instead of an annual interest rate. This is a fixed multiplier applied to the loan amount, meaning the total repayment is agreed upfront and does not change over the life of the loan regardless of how quickly you repay.
| Feature | High Street Bank Loan | Alternative Lender Loan |
|---|---|---|
| Typical interest rate | Lower, from around 4% | Higher, reflects faster access |
| Approval speed | Weeks to months | 24 to 72 hours |
| Trading history needed | Usually 2 to 3 years | Often 6 months or less |
| Credit requirements | Strict | More flexible |
| Application process | Lengthy and document heavy | Streamlined, often online |
| Loan amounts | £25,000 and above typically | From £1,000 upwards |
What Can a Business Loan Be Used For?
One of the advantages of a business loan over more specific finance products is flexibility. Most lenders allow funds to be used across a wide range of business purposes.
Working Capital
Cover day to day operating costs, manage cash flow gaps, or bridge the period between paying suppliers and receiving payment from clients.
Growth and Expansion
Open a new location, hire additional staff, expand into new markets, or invest in marketing to scale the business.
Equipment and Technology
Purchase machinery, vehicles, software, or IT infrastructure without draining your working capital reserves.
Stock and Inventory
Buy stock in larger quantities to benefit from supplier discounts or prepare for a seasonal peak in demand.
Refurbishment
Renovate premises, upgrade facilities, or invest in improvements that increase the value or capacity of your business.
Refinancing Existing Debt
Consolidate multiple repayments into a single manageable loan, potentially at a better rate or over a more comfortable term.
The Pros and Cons
- Fixed monthly repayments make budgeting straightforward
- Funds can be used for almost any business purpose
- A wide range of lenders means more choice on rates and terms
- Alternative lenders can approve and fund within 24 hours
- No equity given away, you retain full ownership of your business
- Repaying on time helps build your business credit profile
- Fixed repayments must be met regardless of trading conditions
- Interest adds to the total cost of the funding
- Newer businesses may struggle to access competitive rates
- A personal guarantee may be required for unsecured lending
- High street banks can take weeks and still decline
What Do Lenders Look At?
Understanding what lenders assess helps you prepare a stronger application and improves your chances of approval at a competitive rate.
Trading history. Most lenders want to see at least six months of trading. The longer you have been operating, the more confidence a lender has in your ability to repay.
Business bank statements. Lenders use three to six months of statements to assess your cash flow, revenue consistency, and how you manage your finances day to day.
Credit history. Both business and personal credit profiles are considered. A clean history supports a stronger application, but many alternative lenders are willing to work with businesses that have imperfect credit.
Turnover and profitability. Lenders want to see that your business generates enough revenue to comfortably service the loan repayments alongside your existing outgoings.
Purpose of the loan. Being clear about what the money is for and how it will benefit the business shows a lender you have a considered plan rather than a short term cash need.
How a Broker Can Help You Find the Right Loan
Applying to lenders directly, one at a time, takes significant time and each hard credit search can affect your credit score. Working with a broker like Caply gives you access to a panel of lenders through a single conversation, with a single soft search that does not impact your credit profile.
We assess your situation, match you with lenders most likely to approve your application, and manage the process from enquiry to funding. There are no upfront fees and we are paid by the lender when a deal completes.
If a business loan is not the right product for your situation, we will tell you. Whether a merchant cash advance, invoice finance, or the Growth Guarantee Scheme is a better fit, we will point you in the right direction.