What loans can I get for my small business and how do I apply?

If you have just started a new business, you may not always have the capital you need to get it off the ground or to help it grow - this is where business loans come in. They can help cover a range of expenses such as initial start up fees, basic overhead costs, or larger costs such as new office locations, equipment, and staff costs. This allows for more stability for companies as they guarantee cash flow will come in, despite whether their products/service are selling well.

It is important to remember that while business loans can be used as a tool to help businesses grow, if not managed properly, they can also cause stress and limit options for the future. You need to ensure that you stay on top of repayments, other it could affect the company’s credit profile or reputation – which can, in turn, affect the ability to take out any other business loans in future.

With that in mind, there are many different ways for businesses to borough money, so you just need to pick the scheme that works best for you and your company. Let’s take a closer look at some of the options that are available.

1. Director Loans:

One of the most common loans that small businesses take are from the directors themselves, as often times when a business is starting up, the director will input a large sum of money into the company to help cover initial costs and guarantee cash flow into the company. This is typically a much more flexible loan, as it is up to the director to determine the loan repayment plan, including the interest that is charged, and can change it at any time if needed. Usually, the directors do not expect repayments to start until the business makes a profit, so there is no pressure on the company.

Benefits:

More flexibility with repayments
- As mentioned, loan repayment plans for director loans are not typically put in place, as the business loans are provided with the best interest for the company, rather than as a personal investment return.
Typically, no interest is charged, or it is at a lower rate
- Similar to the above, directors typically don’t charge interest on business loans provided to their company, as they just want to provide the business with the capital needed to get it off the ground.
Quick to set up, and typically no fees are involved
- Often times, there are interviews and arrangement fees in place when going down the more traditional borrowing route – in this case, directors simply put the money into the business account and the business loan is complete.

Disadvantages:

Can blur the lines between personal and business finances
- This is the case for both official business loans provided to the company, but also for ‘personally paid expenses’ (which is where the director pays for things on behalf of the company and consider it as a loan), since it can get a bit confusing to keep track of the net amount due at the end of the period.
May increase book keeping errors
- As the lines between personal and business finances are blurred, it can be harder to keep track of which expenses are actual business costs, and which are repayments, etc. – especially if the director is also paying for business expenses through their personal account. It is important to keep track of which expenses are actually related to the business so that you can avoid any errors in your accounts.
Higher risk for the director, as these business loans are unsecured
- If the company is not able to repay the loan or it is forced to close down, then the director will typically lose their investment, as they won’t be repaid. You need to make sure that this is a risk that you are willing to take, before lending your company any money.

2. Traditional Bank Loans:

Another way to borrow money for your business is by taking out a traditional bank loan. There are more limitations with traditional bank business loans, as often you are required to be a more established company with extensive accounting records in order to qualify for the loan. Most high street banks will require the company to have at least 2 years of trading history, strong accounts and cash flow (as shown in the profit/loss and balance sheet), a clear business plan (including plans for the use of the loan), and sometimes even personal guarantees if the business is not able to repay the loan. While it may seem like a lot of work just to receive a loan for the business, these traditional business loans often offer a lower interest rate than other options, so can be a great option for long term growth planning.

Typical uses for traditional business loans:

Equipment - machinery, laptops, vehicles, and other asset purchases
Expansion - new office spaces, hiring more employees, creating new departments within the business, marketing campaigns, and more
Long term investments - initial funds for large projects, acquisitions of other businesses, company restructuring, and more

3. Government Loans:

While there are a few different types of business loans you can apply for from the government, the most common one for small businesses is the ‘Start Up Loan’. The amount you can loan ranges from £500 to £25,000 and a fixed interest rate is charged on this, meaning that the rate will stay the same per year – at the moment, their standard interest rate is 6%. Some other benefits of this loan are that there is no application fee or early repayment fee – so you can repay the loan over a period between 1 to 5 years and are not charged any additional fees if you are able to pay off the full loan amount early. Furthermore, if your application is successful and you receive the loan, you will also receive help with writing your business plan, and also 12 months of free mentoring after that.

This loan is slightly different than other business loans you can apply for, as it is actually an unsecured personal loan, rather than a standard business loan. This means that the director must go through credit checks, rather than the business, in order to qualify for the loan. There are some other requirements in order to qualify for this loan – you must live in the UK, you must be 18 or over, and you must either have or plan to start a UK based business that has been fully trading for less than 36 months. This is a great loan for new small businesses that just need that working capital to help them get off the ground.

4. Online Business Loans:

If you are looking for a quick way to borrow some cash for your small business, then an online business loan might be the one for you. After completing the application, it typically takes anywhere from just a few hours to a day for the lender to make the decision on whether to accept or not, so it can be a great option if you need to borrow money to cover some short-term costs. The application process is usually very quick where you simply need to head to the lender’s website and fill out a quick form. There are also often no application fees included and no fees for early repayments either, which is a great benefit. However, a downside to this type of business loan is that there are offer shorter loan repayment terms with higher interest rates, so it is best to make sure that your small business will be able to meet these deadlines before taking out the loan, as you may be personally liable instead.

Some popular online business loans for small businesses are:

Iwoca
- Borrow between £1,000 and £1 million
- Flexible loan repayment schemes, and you can apply for loan top-ups
- Apply in minutes and no fees for early repayments
- Get a decision within 24 hours
- Includes a dedicated account manager for your business loan that offers support
Funding Circle
- Business loan plans ranging from £1,000 to £5 million
- Interest rates varying from 0% to 14.9% depending on the plan
- Offers short term and long-term finance plans for loan repayments
- Apply online in under 10 minutes
- Quick turn around on business loan decisions

These are just a few business finance options that are out there, however, it is always best to explore all your options so that you can select the correct one for your company.

5. Investors:

Another option for small business is to seek funding or business loans from investors. While it may seem a little intimidating to find investors for your small business, there are many people or companies out there who are looking to invest in well-run businesses with a clear plan for the future – not just ‘the next big thing’! Before approaching potential investors, you need to create a clear plan on what the investors are actually looking to fund – whether it is growth (new locations, new products, or new employees), increasing demand by scaling up the small business, new technology systems, and more. Basically, investors don’t want to cover a company’s losses, unlike some other types of loans, so there are expectations that their investment will be used to help the company grow even more from where it already is.

Once you have decided what type of investor you are looking for, you need to prepare your pitch. This should include recent accounts, forecasts for future finances such as cash flow projections, a clear use for the funds, and a realistic breakdown of potential risks involved in the investment. It is important to remember that your pitch doesn’t always have to sound fancy – it just needs to explain clearly what the small business does, who its customers are, and how the investment will help it grow. If you gain some traction from investors and they are interested in offer funding, you also need to agree what type of relationship both you and the company will have with them. Often times, investors will want to gain voting rights in major business decisions, a portion of the small business’ profits, and more, so it is important to decide if you are willing to give this up. It is important to discuss whether the investor is expecting any repayments to be made either. There are also other types of investors, known as silent investors, who provide funding and then expect a small return, but do not impact the decisions of the business, however, typically, this is not often the case for smaller companies.

So, there you have it! There are so many options for small businesses to receive funding, whether it is used to cover start up costs, overdrafts or other expenses, or if you just want to invest in new projects to help grow your small business. You just need to make sure that you select the right plan for your small business so that you stay on top of repayments and don’t create unnecessary debt for your company.