Search
Close this search box.
Edit Content
Search
Close this search box.
Gettyimages 1276570821 Scaled.jpg

A guide to small business funding: Loans, eligibility and applications

In this article, we’ll walk you through what business funding is, the different types of funding you can apply for, how to make sure you’re eligible and how to secure your loan.

What can a business loan be used for?

There are a variety of reasons why a business might opt to apply for funding, including:

  • Buying new equipment
  • Hiring new employees
  • Moving to new premises
  • Buying another business
  • Consolidating debt
  • Marketing
  • Boosting cash flow
  • Purchasing inventory
  • Market expansion
  • Managing day-to-day running costs

Types of funding

There are many types of funding that can provide cash for your business.

Traditional business loans typically fall into one of two categories: secured loans and unsecured loans.

Secured loans

Secured loans require you to provide assets as a form of security.

For example, property is an asset commonly used as security. However, other assets like stocks and shares can be used.

Secured loan lenders may also consider third-party security, such as a guarantee, instead of (or to support) other types of security.

Unsecured loans

Unsecured loans offer your business the option to borrow funds without providing any assets for security.

As a result, unsecured loans are often popular with start-up companies that don’t yet have many assets.

However, as unsecured loans do not require you to provide assets as security, the amount you can borrow tends to be lower and the payback rates can be less favourable.

You’ll also need to provide a personal guarantee, this means that you’ll be responsible for paying back the loan personally if the business is unable to meet the commitment.

Woman applying for a business loan

Further financing options

While any loan you opt for will fall into either the secured or unsecured category, there are many types of financing options available, these can be on short, medium or long repayment terms.

Short-term options:

Invoice finance

When choosing invoice finance, you can opt for either a short or longer-term funding option to release cash from your outstanding invoices. Essentially, with invoice finance, you’ll be able to use your outstanding invoices as security for your loan.

There are three types of invoice finance:

  • Invoice discounting: A type of invoice finance where the funder is advancing cash for unpaid invoices, but the debt collection is conducted by the business itself. Generally, the lender will advance between 70% and 85% of the invoice value to the business and release the remaining amount (minus a small fee) once they get paid by the client.
  • Invoice factoring: A package of services including credit control that usually requires you to ‘sell’ the whole of your debtor book for a predefined period (typically between 12 or 24 months). With this type of invoice finance, lenders might advance as much as 95% of the invoice value before being paid by your client.
  • Selective invoice finance (SIF): This type of invoice finance allows you to pick and choose which invoices you want to fund. So fees are only applied to the invoices you choose to fund, which can make this a more cost-effective option than invoice factoring or invoice discontinuing.

Trade finance

Trade finance is an external source of working capital finance and is a short-term credit typically utilised by companies that export or import goods.

This type of financing allows your business to purchase the stock/inventory needed to fulfil a large order by lending you the money you need.

If your firm has a strong trading record, securing this type of short-term finance should be relatively simple.

Merchant Cash advance

A merchant cash advance, or MCA, is short-term funding for businesses that accept debit and credit card payments. It can be a good option for businesses with no assets, or with limited trading history.

A merchant cash advance utilises your future income to provide cash right away. Essentially, when you take out an MCA, your lender provides a lump sum, which is then repaid from customer card receipts.

An MCA loan may also be called a business cash advance.

Working capital

Working capital finance is a loan used to fund a company’s daily operations or cash flow issues, rather than financing long-term investments.

This type of funding can be secured or unsecured. If you’re looking at secured finance, you will need to provide assets on your balance sheet as security. However, for unsecured loans, lenders will typically be more interested in your business profile and check things like your business’ turnover, history and credit rating.

Medium-term options

Asset finance

Asset finance is a loan that helps you fund the value of assets such as vehicles, buildings, or equipment when you can’t pay for them outright.

This type of finance will support these large purchases by spreading the costs over time and splitting them into smaller, more manageable sums.

Fees and interest are also typically charged in addition to the cost of the purchase.

Medium-term business loans

A business loan is a sum of money provided by a company (such as a bank) to help fund the development of your business.

Property is an asset commonly used as security, although other assets like stocks and shares can be used. Lenders may also consider third-party security, such as a guarantee instead of, or to support other security.

Small Business Loan Application

Longer term options

Pension led funding

Purchasing trading premises or a commercial investment property via a pension fund can be a tax-efficient way in which to borrow. SIPP and SSAS loans are structured finance solutions that allow you to buy commercial property through a pension scheme.

To apply for this type of property-backed, pension-linked borrowing, you’ll need to have set up either a self-invested personal pension (SIPP) or a small, self-administered scheme (SSAS). You can do this through a professional provider or an authorised independent financial adviser. You should discuss their suitability first and ask for advice on the effect they’ll have on your pension plan and investment structures.

Long-term business loans

A long-term business loan is the same as a medium-term loan, however, the money is borrowed over a longer period and the amount you can borrow is typically higher.

The lender provides money to the business and that sum is paid back with interest over an agreed repayment period. With a long-term loan, the interest rate charged could be on a variable or fixed rate basis.

Commercial mortgages

This method of borrowing works in a similar way to residential mortgages and is a method to borrow money secured against a commercial property.

With a loan secured against property, interest rates are generally lower, but you will generally need to provide a larger deposit to put towards a commercial property purchase (typically 30%).

Choosing the right funding

Choosing the right type of funding for your business can be a difficult task.

Depending on the size and stage of your business, you could benefit from having different types of funding in place.

If uncertain, you can seek guidance from people such as business support advisors, your accountant or your business finance broker.

However, to give you an idea of how to choose the best funding for your company, consider these things:

Your needs

It seems self-explanatory but one of the first things to decide is what you need the funds for, and how much you need to borrow.

This will be the starting point for deciding what will be the best finance option for your business.

Creating and regularly updating your business plan and cash-flow projections

Whether you’re starting a business or are already established, creating and regularly updating your business plan is key to your success.

In simple terms, it can help you think about what you’re doing, what you want to achieve and how you get there.

Your business plan and cash flow forecast are key to highlighting any external financing you might need and can also be an indicator of the right type of finance for your business.

You’ll also want to make sure you include the cost of finance in your forecasts (interest and capital repayments) to show a lender that the finance request is affordable based on your projections ahead.

The key to creating a great business plan to support your financing application is to understand why you need the finance and what it is going to be used for.

For example, has your forecast indicated a shortfall over the next 3 months due to seasonality – could a flexible facility like an overdraft be the right choice here?

Or are you looking to buy a new piece of machinery to increase your output and match increased sales? Could asset finance be the right option here?

Eligibility

With any type of loan, there are certain stipulations and eligibility criteria that you will need to meet before being approved. The criteria and requirements laid out for each loan will typically depend on the type of loan, the amount you’re applying for, and which lender you choose.

Factors might also include:

  • Your credit score and repayment history
  • Trading history
  • Your business turnover and profitability
  • Business assets

What lenders are looking for:

When lenders are considering your application, they’ll also think about you as a business owner and what you’re planning to use the money for. To get into the mind of a lender, think CAMPARI:

  • Character
  • Ability
  • Means
  • Purpose
  • Amount
  • Repayment
  • Insurance

Tip: Business owners can check their credit score online. Some of the best-known sites are Experian, CreditSafe or Equifax.

Further reading

Alternative funding for small businesses – With a helpful boost from your bank by no means a given, what are the alternative business funding options to consider for your small business? Where can you turn to for business funding if you need an alternative?

Fast business funding and loans – Worried about cashflow for your small business? Need cash fast? Find out more about fast business funding and who the key providers are.

6 business funding options for growth – We look at six funding options for growing your business. What is available and which option is right for you? Vicki Taylor explains.

Scroll to Top