Small businesses are a massive component of the UK’s economy. With over 5.5 million currently trading, the British government found that small businesses – those with between 0-49 employees – represent a staggering 99.2% of the total business population in the UK (October 2021).
Moreover, due in part to the impact of the pandemic (among other geopolitical factors), 2020 saw 45% of all British SMEs (Small or Medium Sized Enterprises) apply for external financial support. There are many reasons why small businesses might apply for business loans, including operation expansion, investing in new equipment, purchasing new inventory, improving cash flow and management, covering emergency expenses or paying unforeseen bills. However, the fact remains that, if you’re a small UK enterprise seeking business financing, there are a variety of small business loan options available to you.
In this blog post, we’ll examine the different types of business loans and their requirements for eligibility, before describing how, when faced with so many online lenders and business loan providers, you can find the very best option for your organisation.
Whichever type of small business funding you decide on, to give yourself the highest chance of success in your application, take a look at our post, How to Apply for a Business Loan for Small Businesses.
The Various Types of Business Loans in the UK
For small business owners, with so many different types of small business loans available, it can be difficult to know which is best. Below, we’ve broken things down to help you gain a better understanding of your funding options.
Unsecured Business Loans
An unsecured business loan enables an organisation that has been trading for at least 6 months to borrow capital, with a pre-agreed repayment schedule and interest rate put in place beforehand. As a business owner, ‘unsecured’ means that you aren’t obliged to secure the loan with property (either commercial or private). This removes a great deal of risk for the borrower; as a result, costs and interest rates tend to be a little higher.
Suitable for most general business expenses, unsecured loans can be arranged quickly and are a great solution for SMEs who don’t have a lot of high-value assets, or who prefer not to secure the loan against those assets.
Am I eligible?
If you’ve been in business for at least 6 months and are turning over at least £10k per month, you can apply for an unsecured business loan. Lenders will make an assessment of your personal and business credit, and this could affect your application. You are not necessarily required to own property.
Secured business loans
Sometimes referred to as a secured commercial real estate loan, or simply a secured business loan, this is where you as the business owner put up property as collateral against the loan. The property doesn’t necessarily need to be commercial; it may be residential, semi-commercial, or even a buy-to-let property. The amount you can borrow will depend on the total equity of these assets.
A secured business loan reduces the lender’s risk dramatically; consequently, approval rates tend to be higher, and you’ll likely be able to borrow more money over a longer period. Young businesses looking to prepare financial accounts, or those needing to raise a large amount, often favour secured business loans.
Am I eligible?
If you are a home or property owner in the UK, and the director of a company, then the answer to this question is yes. You can bolster your chances of approval by including a detailed finance brief in your application, where you outline your planned use for the funding.
For more detailed information on the difference between secured and unsecured funding, read our blog post on secured vs unsecured business loans.
Asset finance
This type of funding uses assets that you are intending to purchase to secure the loan. The exact nature of the loan will be determined based on the value of the assets. Typically, asset finance is a great option when you are looking to purchase items such as machinery or equipment, though ‘soft assets’ (such as software or soft furnishings) can also be looked at.
It’s common for small businesses to fund a larger project or a surge in growth with asset finance. In this way, it gives you access to the necessary money without up-front capital, and avoids the need to tap into your existing cash flow. It can also be a way to use capital ‘locked’ in expensive equipment.
Am I eligible?
If you are looking to purchase some machinery or equipment, as well as soft assets like software or furnishings, asset finance may be right for you. We can look to assist start ups, so there is no specific time a business needs to be trading for either. This makes this funding option very accessible for all businesses in the UK.
Merchant cash advance
Merchant cash advances are ideal for small businesses that operate seasonally. Sometimes called a PDQ cash advance or a business cash advance, they secure funding based on the card payments your business receives in a given period.
For example, if the agreed repayment percentage is 10%, and you take card payments totalling £10,000 in a particular month, you’ll pay back £1,000; if your next month’s card payments come to £5,000, you’ll pay back £500, and so on until the value of the loan amount (plus a fixed fee) has been repaid.
A PDQ cash advance is an unsecured loan which is dependent on future credit and debit card sales. This is extremely convenient for many small businesses, as you only pay back an affordable portion of what you actually earn. With that said, this type of loan is best suited to businesses taking at least £10,000 per month through eCommerce or card terminals.
Am I eligible?
In general, most companies will gain merchant cash advances if they have been taking card or online payments for at least 4 months. Businesses can only have one cash advance in place at any one time.
Invoice financing
Sometimes, it can take up to 90 days to resolve an invoice, and during that time you’ll be left unable to use the funds while you wait. The invoice financing providers we work with pay up to 90% of the value of unpaid invoices, allowing you to continue the day-to-day running of your business without encountering any financial hiccups.
Invoice financing effectively releases the revenue tied up in unresolved invoices. As the borrower, you’ll be liable to pay interest, a small fee, and the value of the original loan, of course. B2B companies tend to favour invoice financing, though it’s not so common among B2C enterprises. Nonetheless, it is a good way for B2B businesses to solidify their cash flow, and can sometimes be acquired without the need to put anything up as security.
Am I eligible?
If you’re a company selling goods or services on credit to other (creditworthy and trusted) companies, you would be a good candidate for invoice financing. Ideally, lenders would look to see at least 5 invoices per month.
Government-backed schemes
In exceptional circumstances, the government may initiate a programme to help small businesses navigate difficult times. In the US, the Small Business Administration facilitates SBA loans to provide businesses with the funding they need to survive and thrive; here in the UK, the British government takes similar steps to provide small business loans.
The most notable example from recent times has been the Recovery Loan Scheme (RLS), designed to help organisations manage the profound business impact of the coronavirus pandemic. Launched in April 2021 and extended into 2022, at which time the government began to ease back on RLS provision, it represents the kind of financial support accessible via the government – if you know how to find it.
Am I eligible?
To take the RLS as a specific example, the initiative has ended, and no further applications are being accepted as the business world slowly recovers. However, it’s likely that the government may provide small business funding in response to geopolitical events in the future, so it’s worth staying aware of developing situations and what kinds of finance may be available.
Revolving Credit Facilities
A revolving credit facility works in a similar way to a business overdraft. It facilitates business lines of credit for an organisation, giving them flexible access to the cash they need, when they need it. Unlike with term loans, your business is not obliged to borrow a fixed amount; rather, you borrow only the capital you need, and you’ll have the freedom to make repayments as and when it makes business sense – with interest rates added. Then, if you need to borrow another amount within the term of the facility, you’ll be free to do so.
Another bonus with a revolving credit facility is that you aren’t restricted in the way you use the funds – they can be used for pretty much any business expense. A facility typically lasts for up to 2 years, and if everything goes smoothly you’ll probably be offered an extension. Sometimes, lenders may ask for a personal guarantee.
Am I eligible?
All businesses are free to apply for a revolving credit facility, though they’re most often used by entrepreneurs looking for a fixed business line of credit and the freedom to draw down multiple times. Lenders will make an assessment of various factors such as your business credit cards, business credit score and personal credit history in order to determine the viability of your loan.
Bridging loans
If for any reason your business is unable to acquire traditional bank loans, or any one of the above, a bridging loan may be your best bet. Bridging loans are designed to give businesses access to the cash they need, fast; essentially, bridging the gap between a current shortfall and future earnings.
Businesses often seek a bridging loan to purchase or renovate property, though the funds can be used for more or less anything, subject to the loan terms. Due to their flexibility, bridging loans tend to come at a premium; you pay for quick and convenient access to high-value funding.
Am I eligible?
You can get a bridging loan even with a negative credit history, and people often successfully apply for them even if they have a poor business or personal credit score.
However, it’s worth noting that once you’ve financed your asset, you may not be accepted for a secured loan down the line. This can put your assets and/or property at risk.
Securing the Type of Small Business Funding
At some stage in their journey, most business owners investigate their funding options, to find the best ways of securing the working capital needed to help take their organisation from strength to strength. With so many options available and a frankly overwhelming amount of lenders vying for your business, it can be a daunting prospect to try and find the right type of loan for your business.
But the good news is, here at Aurora Capital, we can do the hard work for you! We are dedicated funding specialists, helping businesses both large and small across the UK raise the finance they need. We’re in a position to offer knowledgeable and balanced advice, and we scour the market to source the very best funding solution for each and every one of our clients.
To find out how we can help your business expand and grow, contact our specialist team today.
