Small business loans guide

Chris Godfrey

Updated: November 11, 2021 at 6:34 pm

No matter if you’re a start up, mature business, sole trader, or a company with 25 employees, small business loans are the smart, flexible, and low-cost way to finance business activities. Stop relying on slow cashflow to expand. Turbocharge your company’s growth with a loan that’s purpose-built for your business needs.

What is a small business loan?

How do small business loans work?

Who is a small business loan for?

How much can I borrow?

What are the interest rates?

Small business loan calculator

What fees and other costs should I look out for?

What can I use the loan for?

Government small business loans explained

Can I get a small business loan to buy a business?

Is a small business loan secured or unsecured?

Small business loans for women

Small business loans for veterans

Small business loans for start ups

Small business loans for minorities

Small business loans for agriculture/farming

Can I get a small business loan with bad/no credit?

Can I get a small business loan withour collateral or a guarantee?

Does my business qualify?

How do I apply?

What is a small business loan?

To understand small business loans, we first need to ask, what is a small business? There are several definitions. Depending on who you ask, a small business can have as few as 1 and as many as 250 employees. In our experience, we’ve found that UK lenders define a small business as having up to 50 employees, with turnover less than £2m.

Small business loans may be used for a variety of purposes – start-up, expansion, working capital, asset purchase, debt repayment; even the purchase of a business. Borrowed sums may range from £1,000 up to £500,000 and with repayment terms up to 25 years if the loan was secured against an asset like property or land. Additionally, unlike equity financing, small business loans do not require company principals to surrender any of their ownership.

How do small business loans work?

Small business loans function like many other business loans – a lender provides a sum of money which is paid back over time. The loan may be secured or unsecured and there are usually fees or other costs as well as an interest charge. There are different types of small business loan:

With secured business loans, the borrower provides collateral, (real estate, vehicles, machinery, etc) to protect the lender from loss. Best suited to mature businesses that own hard assets, these types of loans are considered less risky, tend to be larger, and are often cheaper than unsecured loans.

With unsecured business loans, the borrower provides no collateral, so the lender carries more risk. This means the loan is usually smaller and more expensive in terms of fees and interest. To obtain unsecured loans borrowers will typically need good to excellent credit references.

A merchant cash advance (MCA) provides funding for businesses that receive payment via a credit card terminal. This type of loan is ideal for businesses with less than stellar credit.

The lender provides a lump sum that’s repaid from customer card receipts.  MCA loans are flexible, can be set up quickly and they provide scalable funding – as your card receipts grow, so does your ability to borrow.

Although not technically a small business loan, invoice finance utilises the security of a company’s unpaid invoices as the basis for a loan or an advance. Instead of sitting on unpaid invoices, the borrower receives a large percentage of each invoice as soon as it is raised. This type of loan is best for businesses that are trading successfully, but are being slowed down by slow payment of their bills.

Every small business loan is specific to the borrower’s business and the circumstances it is operating in. No two loans are alike. If one type of loan is not available for you, there may always be a different option that delivers what you need. Register with Swoop today to start discovering your options.

Who is a small business loan for?

Small business loans are available for most types of business – from start ups, sole traders, and contractors to companies with as many as 50 employees – and across many sectors: Car dealers, healthcare providers, retailers, ecommerce operations, transport, logistics, artists, vets, dentists, painters, decorators, butchers, bakers, even candlestick makers. If you operate a small business, or you intend to start one, there is almost certainly a small business loan to suit your needs.

How much can I borrow?

Swoop’s lending partners provide small business loans from £1,000 to £500,000, but how much your business can borrow is determined by factors specific to you, your business, and the type of loan you want:

  • Is the loan secured or unsecured?

Secured loans usually offer a larger lump sum.

  • Long term or short term?

Long term loans tend to be bigger than short term loans which are normally used to meet temporary needs.

  • Your credit

This may include your personal credit score as well as your business’s credit rating. The better the score, the more you can borrow.

  • Type of business

Even without the impact of the Covid-19 epidemic, some types of business have a higher failure rate than others. (For example, restaurants and retail). High risk businesses can usually borrow less than companies that operate in more stable sectors.

  • Your business revenues and income

Your business turnover, your profit level, and the average sum in your business bank account all impact the size of your loan offer. Businesses that generate good profit and maintain a solid bank balance will usually be able to borrow more than a company with poor profitability and deep reliance on their bank overdraft. (That is known as ‘cash pressure’, and the more of it your business has, the less you can borrow).

  • Length of time in business

Businesses with longer track records and multiple years of accounts can usually borrow more than start ups and young companies.

  • Assets

See secured loans above. Businesses with hard assets, such as real estate, can usually borrow more than organisations with none.

Swoop’s pool of lenders can provide a loan for many types of business. Even if you’ve been rejected elsewhere, we may still be able to provide the funding you need. Register with Swoop to discover your options.

What are the interest rates?

Interest rates on UK small business loans can vary significantly. Typically, unsecured loans come with a higher rate of interest than secured loans.

Interest rates may be fixed – which means they never change during the life of the loan, or they may be variable – which means the rate will adjust up or down according to bank base rate set by the Bank of England. Most business loans charge interest as a percentage over base rate, (or LIBOR). For example, a loan offered at 2% over base rate, when base rate is 1%, will carry a 3% interest charge. Note that merchant cash advances accrue interest on a daily rate. This type of loan can be more expensive than a standard business loan.

In practice, there is no one size fits all for business loans. The type of loan, type of business, your credit rating, length of time in business, and if the loan is secured or unsecured, all affect the interest rate. This means every small business loan is a custom fit.

Swoop works with lenders who provide business loans across the entire commercial spectrum. Interest rates vary and loans range from £1,000 to £500,000. Register your business to obtain a quote tailored to your exact business needs.

Small business loan calculator

A business loan calculator is a great starting point to understanding the cost of your loan. Use our small business loan calculator to work out your average monthly interest payments and the total monthly repayment amount, as well as the total interest paid and the total cost of the loan.

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What fees and other costs should I look out for?

Business loans generally come with more fees and costs than personal borrowing. This is because every small business loan is different and quite often, the lender will need to carry out significant due diligence to arrive at their loan offer. Typical costs and fees include:

  • Origination fee

A fee that the lender charges for processing your loan. The fee may be flat, but usually, it is calculated as a percentage of the sum borrowed. (For example, 3% fee on a borrowed sum of £10,000 would be £300). Origination fees are paid at loan closing. Often, the lender deducts their fee from the borrowed sum. You repay the fee as part of the loan.

  • Appraisal and Underwriting fees

If the lender is required to conduct an appraisal of the borrower’s assets, they may charge a fee for this service. This is the same as paying for a surveyor’s report on a house you wish to buy. Underwriters carry out due diligence on your application. They check your tax filings, bank statements etc. Fees may be charged to cover the underwriter’s costs. Both appraisal and underwriter fees are usually flat rate and charged at loan closing.

  • Pre-payment penalty

If you wish to pay the loan back early, there may be a cost for doing so. This is called a pre-payment penalty and it is typically equal to one month’s loan payment.

  • Referral fee

If you secured your small business loan through a third-party introduction service, the lender may have to pay them for bringing in your business. The lender may recoup this fee from you, usually collecting at the closing of the loan.

  • Factor rate

The factor rate is used to calculate the cost of a merchant cash advance (MCA) as well as some short-term loans and invoice finance. It’s expressed as a decimal number usually between 1.1 and 1.5. To understand how much your loan will cost, multiply the factor rate by the total amount borrowed. For example, a loan of £10,000 and a factor rate of 1.2, will require you to repay £12,000.

  • Default fees

If you make late payment, miss payments, or default on the loan, there are costs to pay. These include late fees, bank charges, unpaid direct debit fees, interest surcharges and delinquent interest rates. To avoid these costs, only borrow what you can afford. Use the Swoop business loan calculator to find out how much you can borrow and what the repayment costs will be.

What can I use the loan for?

Small business loans can be used for almost every legitimate business activity. Use your loan to buy equipment, real estate, plant, vehicles, machinery, even a business. Use it as working capital to expand, start a new business, or take on more staff. You can even use a low-cost business loan to pay off more expensive short-term business debt.

Government small business loans explained

Small business loans and grants can be obtained from the UK Government. Funds may be provided direct from the government, or the loan comes from commercial lenders who are protected by a guarantee of up to 80% of the loan. Government backed loans and grants include:

  • Start up loans

For small organisations in their initial stages, UK Government small business start up loans can supply up to £25,000 of early money that is repaid in affordable instalments. These loans are unsecured, enjoy a low 6% rate of interest, may be paid back over five years, and are suitable for a wide range of UK businesses. More than 60,000 start up loans have been provided since 2012.

Swoop are part of the UK network of official start up loans referral partners. We do not provide business support as part of this partnership, and we do not charge for anything related to start up loans. However, we may receive a fee from Start Up Loans Company if you subsequently obtain a loan via our referral.

  • Recovery Loan Scheme

Announced on 6th April 2021, the Government’s Recovery Loan Scheme (RLS) promises £75 billion in new funding to support UK small businesses. The RLS is designed to replace other Covid loans, including the government Bounce Back Loan Scheme and the Coronavirus Business Interruption Loan Scheme, which have both now ended.

With the RLS, businesses can apply for a loan of between £25,000 and £10 million. Funds are provided by commercial lenders, but the loans are 80% backed by the Government. Interest rates are capped at 14.99%, although the Government expects this to be much lower in the ‘vast majority of cases’. The RLS runs until June 31 2022.

Not sure if your small business qualifies for Government support? Register with Swoop to find out more.

Can I get a small business loan to buy a business?

The short answer is yes, you can. The longer answer is, yes you can, but do your homework first. Buying an existing business with a loan can have advantages over starting a business from scratch. You buy an established brand, an existing customer base, supplier contacts, track record, stock, perhaps even premises. Set against this are the ‘Goldilocks’ factors that lenders are looking for:

  • Have you evaluated the business you wish to buy?

Have you thoroughly checked the accounts, the assets, spoken to suppliers and customers, researched the market value of the business, and considered the long-term potential? (It’s not a fad). Lenders need concrete answers to these questions. It pays to be prepared.

  • Business reputation.

Does the business have any negative aspects – like supply chain issues, or employee grievances? Business ethics are also important.

  • Customer opinion and expectations.

What do existing customers say about the business? Is it viewed in a negative or positive light? What are customer expectations? Will they be there to support the business a year or so from now? Where will new growth come from?

Is a small business loan secured or unsecured?

It can be either. Secured business loans use collateral, such as real-estate, to provide a guarantee to the lender. This protects them from loss in the event of borrower default. Unsecured loans provide no collateral. The lender is at risk if the business defaults on the loan. Secured loans are typically larger, place less emphasis on the borrower’s credit score and come with a lower interest rate than unsecured loans.

Small business loans for women

According to UK Government statistics, only 19% of SMEs (small and medium size enterprises) are led by women. Additionally, female entrepreneurs are said to be more reluctant to seek business borrowing than their male counterparts. Which is unfortunate, because statistics also show women are generally more reliable than men when it comes to their borrowing.

Swoop works with trusted lenders who understand the lack of representation and difficulty that women face as entrepreneurs and business leaders. These lenders offer loan products specifically designed for women in business – secured, unsecured, merchant cash advance and more. Female borrowers may also benefit from lower interest rates and fees. Additionally, women in business may apply for a government-backed start up loan or Recovery Loan.

Small business loans for veterans

The Ministry of Defence predicts that there will be 1.6 million armed forces veterans in the UK by 2028. Many of these ex-servicemen and women will start their own business. Some will need to borrow to make their business a success. Veterans seeking small business funding can apply for a government-backed start up loan, which provides up to £25,000 of unsecured borrowing at a 6% interest rate and paid back over five years. Other funding options best suited to veterans include:  

  • Secured business loan

The borrower provides collateral, (such as real estate) to protect the lender from loss. These types of loans are considered less risky, and they tend to be larger and cheaper than unsecured loans.

  • Unsecured business loan

The borrower provides no collateral, so the lender carries more risk. These loans are usually smaller and more expensive in terms of fees and interest.

  • Merchant cash advance

A merchant cash advance (MCA) provides funding for businesses that receive payment via a credit card terminal. An MCA is ideal for businesses with less than stellar credit. The lender provides a lump sum that’s repaid from customer card receipts. Repayments are made on a daily, weekly, or monthly basis and as a fixed percentage of card payment receipts.  

Small business loans for start ups

A new business is started in the UK every 75 seconds. For small businesses in their initial stages, UK Government-backed start up loans can supply up to £25,000 of early money that is repaid in affordable instalments. These loans are unsecured, enjoy a low 6% rate of interest, may be paid back over five years, and are suitable for a wide range of UK businesses. More than 60,000 government-backed start up loans have been provided since 2012. If you have a business idea or a young company to expand, a start up loan can give you the financial firepower to succeed.

Swoop are part of the UK network of official start up loans referral partners. We do not provide business support as part of this partnership, and we do not charge for anything related to start up loans. However, we may receive a fee from Start Up Loans Company if you subsequently obtain a loan via our referral.

Small business loans for minorities

Swoop’s pool of trusted lenders provides their full range of small business loans without any racial bias. Unsecured loans, fully secured loans, merchant cash advances and more, are all available to BAME business owners free of limitations. Borrow from £1,000 up to £500,000 at competitive rates, even with bad or no credit history.

Alternatively, if you have a new business idea or a young company to expand, apply for a government backed start up loan. Join more than 11,000 black, Asian, and ethnic minority entrepreneurs have already received funds via this scheme. Borrow up to £25,000 at a fixed 6% interest rate over as long as five years.

Small business loans for agriculture/farming

Farms and agricultural businesses work in cyclical industries. Mother nature controls the production line. This can make cashflow and planning more challenging than for other types of business. Swoop understand the ebbs and flows of working with the land and our lending partners have specialist loan products for farms and agricultural businesses to overcome dips between the harvests.

Borrow up to £500,000 to cover cash flow gaps, buy livestock or machinery, make tax payments, hire more staff, refurbish your premises, or make new investments. Plant the seeds to keep your farm growing.

Can I get a small business loan with bad/no credit?

Yes. Swoop’s pool of specialist lenders provides loan products designed for borrowers with less than perfect credit. These include merchant cash advances – where lenders provide funding for businesses that receive payment via a credit card terminal – and secured loans, where the borrower provides collateral, (such as real estate) to protect the lender from loss.

Even if you have been rejected elsewhere, Swoop may still be able to provide the funding your business needs. Register your business to find out more.

Can I get a small business loan without collateral or a guarantee?

Yes. If your credit is strong, you may qualify for an unsecured loan, or, if your business receives payment via a credit card terminal, you could consider a merchant cash advance. This type of loan is ideal for those with poor credit. The lender provides a lump sum that’s repaid from customer card receipts. Repayments are made on a daily, weekly, or monthly basis and as a fixed percentage of card payments.

Does my business qualify?

Although no two small business loans are alike, Swoop’s pool of lenders have loans for almost every type of organisation and almost every type of situation. Even if your business has been rejected for a loan elsewhere, we may still be able to provide you with the funds you need.

How do I apply?

Swoop provides small business loans for all types of organisation – from start ups, sole traders, and contractors to companies with up to 50 employees. Ask for as little as £1,000 all the way up to £500,000 with our discreet application process. Give your business the funding it deserves. Register with Swoop to get started.

Written by

Chris Godfrey

Chris is a freelance copywriter and content creator. He has been active in the marketing, advertising, and publishing industries for more than twenty-five years. Writing for Barclays Bank, Metro Bank, Wells Fargo, ABN Amro, Quidco, insurers and pension funds, his words have appeared online and in print to inform, entertain and explain the complex world of consumer and business finance.

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