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13 Types Of Small Business Loans That Could Help Grow Your Company

Author Content PartnerContent Partner

12 min read
Better Business

There are many reasons why opting for a small business loan could be beneficial, offering an important injection of cash when you really need it. And the good news is there are lots of different types of business loans in the UK.

13 Types Of Small Business Loans That Could Help Grow Your Company

Making sure you have access to finance and good working capital as a small business owner is crucial for future growth. It allows you to invest in the things that will help expand your company - whether that's new premises, buying the latest tools and equipment, expanding your stock or services, or investing in people development.

There are many reasons why opting for a small business loan could be beneficial, offering an important injection of cash when you need it. And the good news is there are lots of different types of business loans for companies registered in the UK.


Not all business or personal loans are created equal and there are lots of options to consider. Choosing the right one for your company requires careful thought and planning, and will also depend on your ambitions as a business owner or manager, as well as the sector you operate in.

To help you understand more about the variety of small business loans and which one might be right for you, our partners at specialist SME lender Capify have compiled a list of 13 different types of small business finance.

The list includes everything from short term loans to secured business loans, with some of the key pros and cons of each option that you need to be aware of:

  1. Short Term Business Loans

A short-term business loan is a form of finance that offers small businesses access to working capital quickly. Typically, the repayment terms are set over a shorter time frame than other types of loans, but depending on the lender, these could range from one month up to 48 months.

Benefits Of Short-term Business Loans:

  • Cash is often paid into a business bank account very quickly once an application is approved, unlocking access to capital as soon as it is needed.
  • Can help plug a gap such as a temporary hit to a company's cash flow, providing a boost and helping to ensure operations can carry on running smoothly.  

Disadvantages Of Short-term Business Loans:

  • They can often attract relatively high-interest rates compared to other forms of finance. This is usually linked to the shorter repayment periods, so it's important to forecast how long you think you will need the funds for and how soon you think you could pay it back.
  1. Long Term Business Loans

In contrast to short term business loans, a long-term business loan is an option that small businesses can opt for if they know that they will need a longer period to repay the money to a lender. Often this is over several years and usually, the repayment amounts are low, ensuring that small business owners can afford them and they won't have too much of a negative impact on monthly cash flow.

Benefits of long-term business loans:

  • Allows SMEs to take care of any larger expenses which might need addressing. These could range from a renovation to a big recruitment drive, or money needed to explore new markets.

Disadvantages of long-term business loans:

  • They are often harder to qualify for and there can be a lot of hurdles for small businesses to overcome to meet the lending criteria. Strong business credentials are essential and as a general rule of thumb, only businesses that have been in operation for more than three years and can demonstrate strong turnover and growth forecasts are likely to be approved.
  1. Government Small Business Loans

Did you know?

There are government grants specifically for your business, from country-wide to region-specific.

Throughout the COVID-19 pandemic, a range of different business loans was created to support SMEs through the worst of the crisis. These included the Coronavirus Business Interruption Loan Scheme (CBILS) and the Bounce Back Loan Scheme (BBLS).

Both of these schemes have now closed, but businesses that did use the BBLS can use the Government's Pay As You Grow (PAYG) scheme to help manage their cash flow and have a better chance of getting their growth plans back on track.

The CBILS has also now closed, however, a range of accredited lenders are working through the British Business Bank as part of the Recovery Loan Scheme (RLS), which was launched in its place on 6th April 2021. This is another government loan that businesses can use for help in managing cash flow, to support investment and for growth.

The scheme runs up until 31 December 2021 and is then subject to review. A lender can provide up to £10 million through a term loan, overdraft, invoice finance or asset finance.

Each accredited lender has the discretion to decide whether to take personal guarantees but the RLS gives the lender a government-backed guarantee against the outstanding balance.

  1. Secured Business Loans

A secured business loan is a financial product that is linked to company assets. Often, these will be high-value items, such as buildings or land, and these are used as security against the money borrowed to offer some extra reassurance for lenders if the borrower cannot afford to make repayments.

Benefits Of Secured Business Loans

  • It is common for the level of finance through a secured business loan to be high, ensuring that a larger cash lump sum is available for SMEs that choose this as their preferred option.
  • Longer repayment terms usually go hand-in-hand with this type of finance too.

Disadvantages Of Secured Business Loans

  • The risk to small business owners is that they are effectively putting their most valuable business assets at risk if they cannot repay their debts for any reason.
  • Companies that don't have many assets or inventory will often have trouble accessing secured business loans, which means new or start-up companies will often need to seek other alternatives.
  1. Unsecured Business Loans

When it comes to unsecured business loans, there is no direct link to company assets or inventory, removing some of the risk and fear for SME owners of having to hand over company property or facilities if they fall into financial difficulty.

Benefits Of Unsecured Business Loans

  • This type of finance arrangement naturally puts a higher element of risk on the company lending the money, and the trade-off for this is that SMEs will find higher interest rates are usually applied.
  • Another tick in the box for unsecured business loans is that they typically have a faster application process than opting for a secured loan.

Disadvantages Of Unsecured Business Loans

  • Similar to short term business loans, small businesses that decide an unsecured business loan is right for them will more than likely need to stick to a repayment schedule that is quite short, with higher monthly repayments.
  1. Debt Consolidation Business Loans

For some SMEs, a variety of different business loans may have been taken out over the years, and it's not uncommon to have some of these agreements overlapping. From a financial management perspective, this can make it difficult to accurately forecast profit and loss, making it tricky to get a true understanding of your cash flow position.

One type of small business loan that can help with this is a debt consolidation loan. These loans provide a way for businesses to manage their debt in a more organised manner, which is usually achieved by existing business loans being paid off and then one bigger business loan taking its place.

Older business loans are refinanced and this often allows the business to reduce the size of monthly repayments to a level that works for the business. Often the debt consolidation business loan provider negotiates with your existing loan providers to secure a lower interest rate, and this type of agreement can also help towards repairing a poor credit rating in the long term.

Benefits Of Debt Consolidation Business Loans

  • Getting a lower interest rate is one of the biggest advantages for small businesses looking to manage several debts

Disadvantages Of Debt Consolidation Business Loans

  • Usually has a longer repayment schedule stretching for several years. With this type of business loan, there can also be consequences if a repayment is missed, including fees and the possibility of the agreed interest rate going up.
  1. Merchant Cash Advances Or Business Cash Advances

Although the number of lenders offering this type of finance has decreased in recent years, a more unique type of business loan can be found in something called a merchant cash advance.

This is sometimes referred to as a business cash advance, which works through the use of a dedicated debit or credit card terminal installed within the small business borrowing the money.

The card terminal plays a key role and allows repayments to be taken as a proportion of company revenue through each transaction that happens. Retail, leisure and hospitality businesses are often well suited to this type of finance because of the reliance on physical card terminals within the business for customers to use.

There is also the possibility of taking out a merchant cash advance if your business has a poor credit history, but this will depend on each lender and their specific criteria.

Benefits Of Merchant Cash Advances Or Business Cash Advances

  • SMEs can pay more of their loan when business is good, and less when things are not as busy, helping to balance cash flow with the natural peaks and troughs of the company.
  • There are no fixed monthly instalments.

Disadvantages Of Merchant Cash Advances Or Business Cash Advances

  • Better suited to short-term loans and generally have to be repaid within 6 to 9 months
  1. Bad Credit Business Loans

It's not uncommon for businesses that have poor credit ratings to need access to finance and often these can be good businesses with solid growth plans. With some lenders, it can be tough for SMEs to get hold of a business loan if they don't have a strong credit history, but in turn, this then means that it becomes really difficult for these companies to ever be able to improve their credit score.

Bad credit business loans are essentially financial products for small businesses that fall into the category of having a poor credit rating. In this scenario, businesses are often forced to look for different lenders - usually beyond the traditional high street banks – who can offer alternative funding solutions. Certain criteria must still be met concerning things like revenue and growth potential, but lenders offering these types of loans can be a vital lifeline for lots of SMEs.

Benefits Of Bad Credit Business Loans

  • A bad credit business loan can also offer smaller companies’ fast access to cash, a range of options for securing the loan and provide the opportunity to repair a low credit rating.
  • Getting a lower interest rate is one of the biggest advantages for small businesses looking to manage several debts

Disadvantages Of A Bad Credit Loan

  • These types of loans do also attract higher interest rates and other fees compared to some of the other types of small business loans mentioned already.
  • Usually has a longer repayment schedule stretching for several years. With this type of business loan, there can also be consequences if a repayment is missed, including fees and the possibility of the agreed interest rate going up.
  1. Start-up Business Loans

Start-up businesses looking for finance to get off the ground can often run into obstacles due to strict lending criteria and the fact that they haven't had an opportunity to build up a good credit score.

There are still options available, however, and those looking to give fledgling businesses a boost can find small business start-up loans in the UK. These business loans are a financial product designed specifically for firms in the early stages of their development and through the British Business Bank, funds of up to £25,000 can be borrowed.

Benefits Of Start-up Business Loans

  • An advantage of a small business loan for a start-up is the fact that business owners do not have to part with any of their companies to raise capital. Often with venture capital or angel investors, a share of a SMEs ownership is negotiated in exchange for the finance.
  • Currently, repayment schedules with the British Business Bank are between 1-5 years but the finance is government-backed and also comes with free mentoring.  

Disadvantages Of Start-up Business Loans

  • Some things to consider include the fact that it can be difficult to get close to the full amount you want - the average business loan is around £7,200 at the moment. But you can benefit from there being no fees for arranging the loan or paying it back early.
  1. Business Lines Of Credit

Another type of small business loan is a business line of credit, which works in a similar way to a credit card. It's a different type of business loan because SMEs are provided with credit up to a certain value, which they can use as and when they need to.

Benefits Of Business Lines Of Credit

  • The flexibility of this type of finance is something that works well for lots of small business owners, often acting as an emergency fund should they need it. The company will only pay interest on what is borrowed rather than the full value of the credit limit.
  • Often the application process is quite straightforward for this type of finance and the credit line doesn't have to be used - it's there for when the business needs it. Using credit carefully and responsibly can also help improve the credit rating for small businesses.

Disadvantages Of Business Lines Of Credit

  • Some potential disadvantages of business lines of credit are higher fees for maintenance and withdrawals, so it is always worth considering how often you would be likely to dip into the credit available to you.
  1. Equipment Financing

Almost every business will need equipment to operate, whether that’s IT equipment and software, machinery, furniture or company vehicles – equipment is an important part of everyday business operations. But what happens if your business can’t afford the cost of vital equipment when it’s needed? That’s where equipment financing comes in.

Benefits of equipment financing:

  • This kind of loan provides you with finance to purchase equipment, with the cost spread over several years with an agreed-upon repayment schedule. The loan terms can range from lender to lender and generally speaking, no additional assets are needed for securing against the financing deal.
  • For smaller businesses, where cash flow is often tight this is a great option, and unlike alternatives such as leasing, as soon as the loan is repaid the business will own the equipment.

Disadvantages of equipment financing:

  • Often you are restricted to only purchasing equipment and these kinds of loans can have higher interest rates than more traditional business loans.
  1. Working Capital Loans

Working capital finance is a short-to-medium term business loan that will allow you to boost the working capital available to your business – pay wages, purchase stock or plug the cash gap between invoices. Often small businesses use this type of loan to fund a specific operational need as they can rectify cash flow problems quickly, for example, if your business needs to take on more staff during peak trading periods.

Benefits of a working capital loan

  • If your business needs cash injection, then working capital loans are a great option, however, they are designed to be a short-term solution and not for big investments or long-term assets as interest rates are likely to be higher.
  • The flexibility of this type of finance appeals to a lot of SMEs with few restrictions on what it can be spent on and often no need to secure the loan with collateral – although this will depend on your business' credit score at the time.
  1. Peer-to-peer Loans For Businesses

Peer-to-peer or P2P lending is the fastest-growing type of finance in the UK. Essentially, it involves borrowing from other individuals and is often done through an online platform. Depending on your company’s circumstances, and the amount you need to borrow, loans can either be secured or unsecured.

Benefits of a peer-to-peer loan

  • From a borrower’s perspective, the process is similar to applying for a loan from a finance provider, but often the application process is quicker and there is a higher chance of approval. P2P lending decisions are made by individuals, and so if one lender rejects you it doesn’t mean that all of them will.

Disadvantages of a peer-to-peer loan

  • Businesses should consider how manageable their repayments are, as failing to make repayments could lead to complications such as increased charges or even legal action and it could significantly impact your credit report.

Which Loan Is Right For Your Business?

If you’re considering taking out a business loan, then make sure you take the time to assess your business and its needs. Weigh up the pros and cons of each loan before selecting the one that is right for you and do your research to ensure you understand all the costs and terms associated with the type of business loan you want to go for. To get started, ask yourself the following three questions:

  1. How soon do you need funding?
  2. How much funding do you need?
  3. What are manageable repayment terms for your business?

If you are still not sure which is the best small business loan for you, don’t be afraid to call on the help of a professional financial advisor. At Osome, besides providing accounting services to businesses in the UK, we have a wide network of partners that our clients can tap into.

This article was written by our partner Capify.

About Capify

Capify is an online lender that provides flexible financing solutions to SMEs seeking working capital to sustain or grow their business.

If you want to find out how much you could borrow, you can check your eligibility for a small business loan in just 60 seconds or if you want to find out more then don’t be afraid to reach out to them to answer any questions you may have.

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