Borrowing can be the fuel a small business needs to start or grow, but a loan is a commitment that must be repaid whatever happens to the business. Understanding the options and the terms helps you borrow wisely. Here is a plain-English guide for businesses in England and Wales.
The main types of small business loan
- Term loan, borrow a lump sum and repay it (with interest) over a fixed period. Good for one-off investment (equipment, premises, expansion).
- Overdraft / revolving credit, flexible short-term borrowing for cash-flow gaps; you pay interest on what you use.
- Secured vs unsecured, a secured loan is backed by an asset (property, equipment) the lender can take if you default, usually with lower rates; an unsecured loan has no specific asset as security but often costs more and may require a personal guarantee.
- Asset finance, borrowing to buy (or lease) equipment, secured on that asset.
- Invoice finance, borrowing against unpaid invoices to release cash tied up in your sales ledger.
Government-backed and start-up options
- Start Up Loans, government-backed personal loans for new businesses (with mentoring), aimed at founders who may struggle to get conventional finance.
- British Business Bank programmes, the government's economic-development bank supports lending to smaller businesses through partner lenders and guarantee schemes.
- Grants, non-repayable funding may be available for certain sectors or activities (worth checking before borrowing).
Key terms to understand
- Interest rate / APR, the cost of borrowing; compare the total cost, not just the headline rate, and check whether the rate is fixed or variable.
- Term and repayments, how long, and how much per month; make sure the cash flow works.
- Fees, arrangement fees, early-repayment charges, late fees.
- Security and personal guarantees (what happens if you can't pay. A personal guarantee can put your personal assets (even your home) at risk despite a company's limited liability) take advice before signing one.
- Covenants/conditions, ongoing requirements (e.g. financial ratios, information) you must meet.
What lenders look for
To improve your chances and terms:
- a solid business plan and realistic financial forecasts;
- trading history and accounts (or, for start-ups, a strong plan and personal credit history);
- affordability, evidence you can service the repayments;
- a good credit profile (business and, often, the owners');
- any security you can offer.
Tips for borrowing wisely
- Borrow for the right reason, productive investment, not to plug a structural loss.
- Shop around, banks, challenger banks, online lenders and government-backed schemes.
- Read the small print, especially on personal guarantees, variable rates and early-repayment charges.
- Match the finance to the need, short-term cash-flow needs suit overdrafts/invoice finance; long-term investment suits term loans.
- Take advice, an accountant can help you choose and present your case.
Key takeaways
- Common options: term loans, overdrafts/revolving credit, secured or unsecured loans, asset finance and invoice finance.
- Consider government-backed routes like Start Up Loans and British Business Bank schemes, and check for grants.
- Scrutinise the total cost (APR), fees, security and personal guarantees, a guarantee can risk your personal assets.
- Lenders want a credible plan, affordability and a good credit profile, match the type of finance to the need.
Sources
- Government-backed Start Up Loans and British Business Bank finance programmes for smaller businesses
- Financial Conduct Authority rules on regulated lending; general law on guarantees and security
- General commercial-lending practice in England & Wales (secured/unsecured loans, asset and invoice finance)
--- This article is general information about the law of England & Wales as at 2026, not legal or financial advice. For advice on your circumstances, consult a qualified solicitor or financial adviser.