What Types Of Small Business Loans Are Available?

Setting the scene: small business borrowing in the UK

Running a small business often means juggling uneven cash flow, surprise costs and opportunities that cannot wait. The challenge is that “a small business loan” is not one single product. In the UK, lenders typically group borrowing into secured and unsecured loans, plus term finance (a fixed amount repaid over time) and revolving finance (a facility you can draw down and repay repeatedly). Understanding these categories matters because the right choice depends on what you need the money for, how predictable your income is, and what you are comfortable putting at risk. Get it right and finance can help you invest, smooth working capital and plan with confidence. Get it wrong and you may pay more than necessary, or take on obligations that strain your business at the worst possible time.

Understanding APR isn’t just about percentages - it’s about knowing what you’ll pay in real terms.

Who this is designed for

This guide is for UK consumers who run, or are about to start, a small business and want plain-English explanations. It is particularly relevant if you are comparing lenders for the first time, trying to fund equipment or stock, or dealing with the common issue of customers paying you later than you would like. It is also useful if you have heard terms like “asset finance”, “invoice factoring” or “revolving credit” and want to understand what they actually mean before you commit.

The options, explained: what’s available

In broad terms, business borrowing falls into a few main buckets. Secured loans are backed by an asset, which can make lending more achievable or cheaper, but it raises the stakes because the asset may be at risk if you cannot repay. Unsecured loans do not require specific collateral, but lenders may rely more heavily on credit history, affordability checks, and sometimes personal guarantees.

Alongside that security split, there is the shape of the borrowing. Term finance provides a lump sum repaid over a fixed period, which can work well for one-off investments such as expansion, a refit, or purchasing a vehicle. Revolving facilities, such as overdrafts and business credit cards, are designed for flexibility: you can borrow up to an agreed limit, repay, and borrow again, which suits seasonal trading or short-term gaps. There are also specialist products, such as invoice finance (borrowing against unpaid invoices) and merchant cash advances (repaid through a share of card takings).

How these loan types work in practice

Most lenders start with the basics: what the funds are for, how much you need, and how the business will afford repayments. Smaller business loans are often used for day-to-day costs or longer-term investment and commonly sit in modest borrowing ranges, although limits vary widely by lender and business profile. When finance is unsecured, you may see stricter underwriting and, in some cases, a request for a personal guarantee, which can make you personally liable if the business cannot repay.

Specialist lending has its own mechanics. Invoice finance can release cash tied up in receivables by advancing a proportion of an invoice’s value before your customer pays. With invoice discounting, you typically keep control of collections; with factoring, the finance provider may handle collections and payment can go directly to them. Asset finance spreads the cost of equipment, machinery or vehicles over an agreed term and is commonly secured against the asset itself, often structured as hire purchase or leasing.

Why the “right fit” matters more than the headline rate

Choosing finance is not just a price comparison. The structure affects risk, flexibility and day-to-day pressure on cash flow. A term loan can be reassuringly predictable, but fixed repayments can be difficult if revenue is lumpy. Revolving credit can provide breathing space, but it can also tempt businesses to rely on it permanently, particularly if pricing changes or limits are reduced.

The purpose of the borrowing should drive the product. Funding a long-lived asset with very short-term credit can create a constant refinance headache. Equally, using a longer-term loan to cover a temporary cash gap can mean paying interest longer than needed. For early-stage founders, government-backed options can be worth considering: the UK Start Up Loan scheme offers unsecured personal loans from £500 to £25,000 for eligible businesses trading for less than five years, with a fixed interest rate and terms of one to five years, plus the potential for mentoring support. For established SMEs, government-backed guarantee schemes can sometimes support larger facilities and improve lender appetite where standard criteria are tight.

Pros and cons at a glance

Things to look out for before you apply

The fine print matters because it changes your real-world cost and risk. Start by checking the total cost of credit, not just the interest rate. Fees, repayment schedules and any broker or arrangement costs can materially affect what you pay over time. If a personal guarantee is involved, make sure you understand exactly what is covered, whether it is limited or unlimited, and what would happen if the business fails.

Be realistic about cash flow. A lender may approve a repayment you can technically afford on average, but businesses rarely earn “average” money each month. Stress-test repayments against quieter periods, delayed customer payments and VAT or payroll pinch points. For revolving facilities, ask how pricing is calculated, whether the limit can be reduced, and what triggers a review. For invoice finance, understand who controls credit chasing and how disputes or credit notes are handled. For asset finance, check mileage, maintenance obligations, end-of-term options and any charges for changing the agreement.

Alternatives to consider

1. Government-backed Start Up Loan (for eligible businesses trading under five years)

2. Asset finance instead of a standard loan (for vehicles, machinery or equipment)

3. Invoice finance (to unlock cash from unpaid invoices)

4. Revolving credit such as an overdraft or business credit card (for short-term flexibility)

5. Merchant cash advance (for card-heavy businesses needing speed, accepting higher cost)

6. Growth-focused, government-backed guarantee schemes (for eligible SMEs seeking larger facilities)

7. Peer-to-peer lending, crowdfunding, grants, angel investment or venture capital (often used by start-ups as part of a funding mix)

FAQs

What’s the difference between a secured and unsecured business loan?

A secured loan is backed by an asset, which can reduce a lender’s risk. An unsecured loan does not require specific collateral, but lenders may rely more on credit checks and may ask for a personal guarantee.

Are small business loans only for established companies?

No. Some products are aimed at newer firms. For example, the Start Up Loan scheme is designed for people starting or growing a UK business that has been trading for less than five years, subject to eligibility and checks.

Is an overdraft a loan?

It is a form of borrowing, but it works differently from a term loan. An overdraft is typically a revolving facility: you can dip in and out up to a limit, and it is often used to manage short-term cash flow rather than fund a big purchase.

How does invoice finance help with cash flow?

If you invoice customers on 30, 60 or 90 day terms, invoice finance can advance money against those invoices so you are not waiting for payment to cover wages, stock or VAT. The exact setup depends on whether you use discounting or factoring.

Are merchant cash advances a good idea?

They can be useful for businesses with strong card sales and variable daily income because repayments move with turnover. However, the effective cost can be higher than traditional borrowing, so it is usually a trade-off between speed or accessibility and price.

How Kandoo can help

Kandoo is a UK-based finance broker. If you are exploring business borrowing and want a clearer view of what might suit your needs, Kandoo can help you compare options and understand the differences between product types. The aim is to connect you with suitable choices for your goals and circumstances, whether that is improving cash flow, funding equipment, or planning for growth.

Disclaimer

This article is for general information only and does not constitute financial advice. Borrowing is subject to eligibility, affordability checks and lender criteria, and terms can vary. Consider seeking independent advice before taking out finance.

Related reading: How To Get A Business Loan, What Are Business Loans Used For?, How Are Business Loans Secured?.