- Start Up Loans, delivered through the British Business Bank, are government-backed personal loans for business of 500 to 25,000 pounds at a fixed 6 percent annual rate, with terms of one to five years.
- A representative APR on a business loan must reflect the total cost of credit, including interest and any compulsory arrangement or product fees, under FCA disclosure rules where consumer credit law applies.
- Many small business loans are unregulated, so the borrower protections of the Consumer Credit Act do not automatically apply once you sign as a company.
- A personal guarantee makes a director personally liable for the debt if the company cannot pay, putting personal assets such as savings or a home at risk.
- Lenders typically size affordability against a debt service coverage ratio, often looking for net profit or cash flow of at least 1.25 times the loan repayment.
How much you can borrow depends on cash flow, not hope. Lenders test affordability using coverage ratios, judge total cost by APR not headline rate, and often ask for security or a personal guarantee. Calculate the real monthly cost before you sign.
Last reviewed: June 2026
What a business loan calculation actually answers
Two questions sit behind every business borrowing decision: how much will a lender give, and how much can the business safely repay. They are not the same number. A lender might approve a larger facility than your cash flow can comfortably service, and an affordable repayment might be smaller than the amount you want. Working both figures out before you apply saves time and protects the business from taking on debt that strangles it later.
The starting point is honest arithmetic. Take your monthly net profit or, better, your free cash flow after tax, owner drawings and existing loan repayments. That surplus is what funds a new repayment. Multiply a comfortable monthly repayment by the loan term in months and you have a rough ceiling on principal plus interest. From there, the loan type, the rate and any security requirement shape the final structure.
Types of business loan available in the UK
There is no single product called a business loan. The market splits into distinct structures, each suited to a different purpose, and choosing the wrong one is a common and expensive mistake.
Term loans are the familiar lump sum repaid in fixed instalments over a set period, usually one to seven years for unsecured lending and longer when secured against property. They suit one-off investments such as refurbishment, a vehicle or a capital purchase, where you know the amount up front and want predictable repayments.
Revolving credit facilities work more like a business overdraft or credit card. You are approved for a limit, draw down what you need, repay it and draw again, paying interest only on the balance used. This flexibility suits uneven cash flow and short-term working capital gaps rather than large fixed purchases.
Asset finance lets you spread the cost of equipment, machinery or vehicles. Under hire purchase you own the asset at the end of the term; under a finance lease you effectively rent it. The asset itself usually acts as security, which can make approval easier for newer businesses.
Invoice finance advances cash against unpaid customer invoices. With invoice factoring the provider also manages collections; with invoice discounting you keep control of your sales ledger. It releases working capital tied up in slow-paying clients, which is valuable for businesses that invoice on 30 to 90 day terms.
Government-backed Start Up Loans are personal loans for business purposes aimed at new or very young businesses that may not yet qualify for commercial lending. Delivered through the British Business Bank, they carry a fixed 6 percent annual interest rate and include free mentoring and business plan support.
Loan type, amount, term and security at a glance
| Loan type | Typical amount | Typical term | Security required |
|---|---|---|---|
| Unsecured term loan | 1,000 to 500,000 pounds | 1 to 7 years | Often a personal guarantee, no asset charge |
| Secured term loan | 25,000 pounds and up | Up to 25 years | Charge over property or other assets |
| Revolving credit | 5,000 to 250,000 pounds | Rolling, often 12 months renewable | Personal guarantee common |
| Asset finance | Cost of the asset | 2 to 7 years | The asset itself |
| Invoice finance | Up to around 90 percent of invoice value | Rolling against ledger | The outstanding invoices |
| Start Up Loan | 500 to 25,000 pounds per founder | 1 to 5 years | None: unsecured personal loan |
Figures above are typical ranges as of 2026 and vary by lender, sector and trading history. Treat them as a planning guide rather than a quotation.
How lenders assess affordability
Affordability is the heart of any business loan decision, and the calculation is more demanding than for a personal loan. A lender wants evidence that the business generates enough surplus cash to cover repayments even if trading dips.
The central tool is the debt service coverage ratio, often written as DSCR. It compares the cash available to service debt against the total debt repayments due. A ratio of 1.0 means the business exactly covers its repayments with nothing to spare, which lenders consider too tight. Many underwriters look for at least 1.25, meaning the business produces 1.25 pounds of available cash for every 1 pound of repayment. The buffer absorbs seasonal swings and unexpected costs.
To reach that judgement, lenders typically review filed accounts, recent business bank statements, management accounts, and projections for newer or growing firms. They look at turnover trend, profit margin, existing debt commitments, the personal credit history of directors, and the purpose of the borrowing. A loan that increases revenue-generating capacity is viewed more favourably than one plugging a recurring cash shortfall.
You can run the same test before applying. Add up your existing loan, lease and overdraft repayments, add the new repayment you are considering, then divide your annual operating cash flow by that total. If the answer is below about 1.25, the application is likely to be tight and you may need a smaller sum or longer term.
What APR means for a business loan
The headline interest rate rarely tells you the full cost. The annual percentage rate, or APR, is designed to capture the total cost of credit over a year, including the interest and any compulsory fees such as an arrangement or product fee, expressed as a single yearly percentage. Where consumer credit law applies, lenders must show a representative APR so borrowers can compare like with like.
Two loans can advertise the same interest rate yet cost very different amounts once fees are included. A 10,000 pound loan at 9 percent interest with a 5 percent arrangement fee costs more than one at 10 percent interest with no fee. APR exposes that difference. Be alert to quotes given as a flat rate, where interest is charged on the original amount throughout rather than on the reducing balance: a flat rate looks cheaper than it is, and the equivalent APR is often close to double the flat figure.
One important caveat applies to companies. Much small business lending is unregulated, because Consumer Credit Act protections largely cover individuals and sole traders borrowing modest sums. Once you sign a loan as a limited company, you may not benefit from the same APR disclosure or cooling-off rights. Read the agreement carefully and ask for the total amount repayable in pounds, not just a percentage.
British Business Bank schemes
The British Business Bank is the government-owned development bank that supports access to finance for smaller UK businesses. It does not usually lend directly to most firms; instead it works through partner banks, funds and delivery partners, and it backs several named programmes.
The Start Up Loans programme is the most directly accessible, offering the fixed-rate personal loans for business described above plus mentoring. Beyond that, the bank has run guarantee schemes that encourage commercial lenders to support businesses that lack the security or track record for ordinary loans, by sharing part of the lender's risk. The names and terms of these schemes change over time, so check the British Business Bank website for the programmes open as of 2026. The practical point for a borrower is that a government guarantee behind a lender does not remove your obligation to repay; it reduces the lender's loss, not yours.
Security and personal guarantees
Security is what the lender can claim if the loan is not repaid. Secured loans take a charge over a specific asset, commonly commercial property, which can lower the rate and extend the term because the lender's risk falls. Asset finance and invoice finance are secured against the financed item itself.
Unsecured loans take no asset charge but very often require a personal guarantee from one or more directors. This is a separate legal promise that, if the company defaults, the named individual will repay the debt from personal funds. The protection of limited liability, the usual firewall between company and personal finances, does not apply to a debt you have personally guaranteed. That can put savings, investments and in some cases the family home at risk. Some directors take out personal guarantee insurance to cover part of the exposure. Before signing, confirm the maximum amount guaranteed, whether it is joint and several across multiple directors, and how the guarantee ends when the loan is repaid.
Frequently Asked Questions
What types of business loan are available in the UK?
The main structures are term loans, revolving credit facilities, asset finance, invoice finance and government-backed Start Up Loans. Term loans give a fixed lump sum repaid over a set period, revolving credit works like a flexible overdraft, asset and invoice finance are secured against the item or unpaid invoices, and Start Up Loans support new businesses. The right choice depends on whether you need a one-off sum or ongoing working capital.
What is a personal guarantee?
A personal guarantee is a legal promise by a company director to repay a business debt personally if the company cannot. It removes the protection of limited liability for that specific loan, so personal assets such as savings or property can be at risk. Lenders commonly require one on unsecured business loans. Always check the maximum amount you are guaranteeing before signing.
What is the Start Up Loans scheme?
The Start Up Loans scheme is a government-backed programme delivered through the British Business Bank for new and early-stage UK businesses. It provides unsecured personal loans for business purposes of 500 to 25,000 pounds per founder, at a fixed 6 percent annual interest rate, repayable over one to five years. Successful applicants also receive free mentoring and help with their business plan.
How do lenders assess business loan affordability?
Lenders review your accounts, bank statements and cash flow to judge whether the business can comfortably cover repayments. A key measure is the debt service coverage ratio, comparing available cash against total debt repayments, with many lenders looking for at least 1.25 times cover. They also consider turnover trends, profit margins, existing debts and directors' credit history.
What is asset finance?
Asset finance lets a business spread the cost of equipment, machinery or vehicles rather than paying up front. Under hire purchase you own the asset once payments finish; under a finance lease you rent it for the term. The asset usually acts as the security, which can make approval easier for newer businesses that lack other collateral.
