How Do Business Loans Work?

loan contract approved

Securing a business loan was once a difficult thing for small and medium-sized businesses to do. The only ways to secure capital for your business were through methods like investing your savings, financial support from family or angel investors.

Fast forward a few years, and there are now numerous options available. From secured or unsecured loans, to government-backed recovery loans and asset finance, and many more options besides, business loans are available at the click of your fingers. But how exactly do business loans work?

Business loans are there to financially support companies and enable ongoing operations, with the goal of helping support business growth. For example, this might come in the shape of property redevelopment, goods repayments, or helping to enhance and finalise a project.

However, depending on which type of business loan you choose, you will need to set up a repayment plan to ensure you can meet the costs – plus the interest of taking out the loan.

The Business Loan Process

  • Firstly, you need to identify which type of loan will be most beneficial to your business, and start from there.
  • When contacting lenders such as firms or banks, you’ll need to provide them with some basic business documents which will help them determine which loan is most suitable for your business.
  • The lender will then provide you with terms and conditions for the loan. This is where your repayment plan comes in. Before finalising the loan completely, look at your monthly income and outgoings, to ensure you can repay your loan in time.
  • Some of the most common repayment plans are direct debits or standing orders, or a percentage taken from the business revenue.

One of the most important things to keep in mind is that if you don’t pay your loan and interest back in time, you may have to pay additional fees. This could potentially impact your credit score, too.

However, if you do repay all your loans on time, or you simply have no credit history, unsecured loans can actually help you build a great credit score while funding your business and helping you meet business needs. This helps businesses appear more reliable or trustworthy when it comes to securing future loans.

Unsecured loans

Unsecured loans are probably the most popular type of loan available, due to their convenience and accessibility.

When banks and lenders agree to loans, they require some sort of collateral which provides them with security, such as commercial property, e.g., real estate or even business inventory.

Unsecured loans take consideration of your credit history, score and reliable income to determine whether lenders will agree to a loan. However, due to there being no collateral, the interest rates are known to be higher for unsecured loans.

Funds are usually provided as a lump sum, and can typically be used to fund new businesses or facilitate company expenses such as machinery/equipment or staff. Securing this type of loan can be seen as ‘easier’ than other loans; instead of going through lengthy approval processes, you can apply through an online application.


One of the best ways to help small and medium-sized businesses is to secure a loan that will actually help business success, and create a plan that will benefit the borrower while ensuring the loan is paid on time – which, in turn, increases your credit score. Thankfully, now even if businesses don’t have great credit, they still have multiple loan options available to them.