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Guide

How business loans work in the UK

If you have never borrowed for the business before, the mechanics are simpler than the jargon suggests. Here is what actually happens, what it costs, and what you are signing up to.

The basic mechanics

A lender advances money to the company. The company repays it in instalments over an agreed term, with interest and any arrangement fee on top. Two things vary most between products: how the money is released, and how it is repaid.

  • Term loan — a lump sum up front, repaid in fixed monthly instalments over 3 months to 6 years.
  • Revolving credit facility — an approved limit you draw from and repay repeatedly; you pay interest only on what is drawn.
  • Invoice finance — funds released against unpaid invoices and cleared when customers pay.
  • Merchant cash advance — repaid as an agreed percentage of daily card takings, so repayments flex with sales.
  • Asset finance — the lender buys the asset and the company pays it off over the asset's useful life.

What it costs

Commercial lending is priced on risk, not on a single advertised rate. Expect the total cost to be made up of three parts:

  • Interest — quoted as an annual rate, a monthly rate, or a flat factor. Ask which, because they are not comparable at face value.
  • Arrangement fee — a one-off percentage of the facility, often deducted from the advance.
  • Early settlement terms — some lenders rebate unused interest, others charge a fixed total regardless.

The honest comparison is the total amount repayable over the life of the facility, not the headline rate.

Secured, unsecured and personal guarantees

Unsecured lending is not risk-free for the director. Most unsecured commercial facilities require a personal guarantee, which makes a named director liable if the company cannot repay. Secured lending puts a charge over a specific asset instead, which usually means a larger facility and a lower rate, but a slower process and real consequences on default.

From application to funds

  • Initial enquiry — the company provides basic details and the commercial purpose. Backed does not run a credit search.
  • Full application — bank statements, filed accounts and management figures.
  • Underwriting — affordability, existing debt, trading stability and the purpose of the funds.
  • Offer — the amount, term, rate, fees and any security or guarantee required.
  • Drawdown — if approved and accepted, the provider confirms when and how funds are released.

The most common delay is not the lender. It is waiting on documents from the business, so gather statements and accounts before you start.

Common questions

How do business loans work in the UK?
A lender advances a lump sum or a credit limit to the company. The company repays it over an agreed term with interest and any fees. Unsecured loans usually require a director's personal guarantee; secured loans are backed by an asset such as property or equipment.
Does a business loan affect my personal credit score?
Submitting an enquiry to Backed does not itself run a credit search. A funding partner may carry out company or director checks later and should explain the type of search and seek any consent required. Liability under a personal guarantee can affect a director personally.
How much can a UK limited company borrow?
A provider may consider turnover, cash flow, existing commitments, purpose, credit profile and any available security. The amount, if any, is determined by the provider after reviewing the application.
Are business loan repayments tax deductible?
The interest and fees on a business loan are usually an allowable business expense; the capital repayment is not. Confirm the treatment with your accountant for your own circumstances.
How long does a business loan take?
Timing varies by provider, product, due diligence and document availability. Secured and asset-backed facilities may also require valuations or legal work.

Tell us what your company needs to fund

Backed may introduce your company to one or more funding partners whose criteria may fit. Providers determine eligibility, approval, pricing and terms.

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