How much will a business loan cost me?

How is Technology Improving the Loan Approval Process2

Business loans are becomingly increasingly popular, with UK businesses borrowing £9.2 billion in January 2019 alone, most of which was championed by larger businesses of £5.3 billion and an annual growth rate of 6.4%.

For small and medium size businesses, the use of business finance can offer important funds for cash flow purposes, staffing, overheads, growth periods or to consolidate debts. The cost of the business loan will vary on numerous factors and you should know that the traditional method of going to your high street bank is very old school and now we have savvier Fintech companies that can offer faster funding and more competitive rates.

Basic rates

The basic rates for business loans are from 6% (Yorkshire Bank) to 50% APR (Iwoca), depending on your criteria and the company that you use. Businesses that are looking for loans online can borrow between £1,000 to £1 million over 12 to 60 months, with more proof and criteria required when looking to borrow larger amounts.

Secured vs unsecured

Business loans can be made available as secured or unsecured business loans.  When adding security, this could be giving up a stake in your business or securing against your inventory, stock or premises – and you risk losing this if you cannot repay your loan on time.

Secured loans will offer much lower rates of APR because you are giving up something valuable as collateral and the lender has potentially more to gain if you cannot fulfil your loan obligations.

Unsecured loans are typically more expensive because the loan approval is based only on your income and credit score – and if you go missing or AWOL, the lender has nothing to recoup.

Credit scoring

You will have a business credit score, which is the credit rating assigned to your business. This will consider whether you have any existing debt on your company and how well you have paid other types of loans and credit in the past. This is different to your personal credit score, although directors may also be credit checked during the application process. Those with poor credit scores will typically be refused, will pay higher rates of interest or require their loan to be secured to add additional security.

Trade history

Most high street banks and business finance lenders require at least 24 months of trading history and to see a company that is profitable. This gives them peace of mind that you are fully functioning and have a business model that can generate income and successfully repay the loan.

There are some lenders and government grants that are designed to assist start-ups and companies that have been trading for less than 24 months. Specifically, those businesses working in sought-after industries and trying to make a difference will be eligible for grants including sustainability, technology, females and charities. 

Loan duration

The loan duration will influence how much your business loan will cost, with longer-term loans accumulating more interest and therefore charging more over time. If you wish to repay your loan early, you can typically do so, but be cautious of paying too early, since you may incur early repayment fees or exit fees if it is before the threshold. This information will be presented to you in writing before your loan is funded.