How to get a loan to open a small business in the UK

Starting a small business is an exciting and challenging journey, especially when it comes to securing funding.

In the UK, the SME lending market grew 30% year-on-year in Q1 2025, with major banks lending nearly £4.6 billion. But despite this growth, there’s still a £90 billion lending gap that challenger banks and specialist lenders are helping to fill – suggesting many small businesses aren’t getting the funding they need.

With the right information and approach, navigating the business loan market is relatively straightforward. And whether you’re considering traditional bank loans, government-backed schemes, or alternative lending options, knowing where to look and what to prepare can make all the difference.

In this article, we’ll walk you through the different types of loans available, how to apply, and how to improve your chances of getting approved.

Key points:

• Business loans can help cover startup costs, purchase equipment, manage cash flow, or fund growth plans

• Understanding how different types of loans work and what they’re best suited for is crucial in making the right decision

• Funding Options by Tide can help when optimisation of working capital isn’t enough, offering access to business finance up to £20 million

What are your business financing needs?

Before making a loan application, it’s important to think about your business’s financial needs and goals.

• How much funding do you actually need?

• What will you use the money for?

• How quickly do you need the funds?

• What repayment terms would work best for your business?

Understanding how much you need to borrow and how you’ll use that money will help you choose the right type of loan. For example, if you’re launching a new product line and need to buy equipment, you might do well with an asset finance loan. Or if you’re covering day-to-day expenses during a slow season, a working capital loan might be more suitable.

Consider your business plan and financial projections carefully since lenders will want to see that you have a solid growth and repayment strategy.

If you’re not sure how much funding you need, you can use our business loan calculator to help estimate your requirements.

What types of business loans are available in the UK?

When considering different loan options, you’ll come across several types of business loans, each designed for different needs.

Here’s a quick overview of the most common types available in the UK:

• Term loans: These can be secured (requiring collateral, such as property or equipment) or unsecured and are typically repaid over up to 10 years. Secured loans typically have lower interest rates and higher borrowing limits than those unsecured.

• Asset-based loans: Designed for buying equipment or property, these loans use the asset itself as collateral. They can be a good option if you need to purchase high-value items for your business.

• Working capital loans: These loans are designed to cover day-to-day operational expenses, making sure you have enough cash flow to keep your business running smoothly.

• Invoice finance: This lets you borrow against unpaid customer invoices, providing immediate cash flow while you wait for the payments to come in. It’s particularly useful for businesses with long payment cycles or seasonal fluctuations.

• Start Up Loans: Aimed at businesses less than three years old, these unsecured loans range from £500 to £25,000 and come with mentoring services to support you in the early stages of growth.

Each type of loan has its pros and cons, so understanding which one most closely aligns with your business needs is important to maximise your long-term success.

What government-backed schemes are available?

Government-backed loan schemes are designed to reduce the risk for lenders and make it easier for you to secure the funding you need. The schemes often come with lower interest rates, more flexible repayment terms, and additional support services like mentoring.

One popular option is the Start Up Loans scheme (launched in 2012), which offers loans ranging from £500 to £25,000 at a fixed interest rate of 6%. The loans are unsecured, meaning you don’t need to put up collateral, and they come with up to 12 months of mentoring to help you succeed.

Another valuable scheme is the Growth Guarantee Scheme (launched in 2024), which facilitates loans of up to £2 million for smaller businesses. The funding and application is linked to lenders, with the UK Government guaranteeing the financing should your business be unable to pay back the lender.

What loan approval criteria do small businesses need to meet?

To secure a loan, you’ll need to meet certain approval criteria. Lenders typically look at the following factors when considering your loan application:

• Credit history: A strong personal and business credit history can greatly improve your chances of approval. If your credit score’s on the low side, consider taking steps to improve your credit score before applying.

• Business plan: Lenders want to see that you’ve got a clear vision and a solid plan for success. So you’ll need to prepare a detailed business plan that outlines your market analysis, financial projections, and growth strategy.

• Collateral: For secured loans, you’ll need to provide collateral (eg property or equipment). This reduces the risk for lenders and can help you secure better loan terms.

• Financial statements: Be prepared to provide financial statements, including balance sheets, income statements, and cash flow projections to give lenders insight into your business’s financial health.

How do loan applications work for small businesses?

Applying for a business loan involves several steps, from preparing your documents to submitting your application and waiting for approval:

1. Prepare your documents: Having your documents ready can speed up the application process. You’ll likely need:

   1. A business plan (outlining your operations, strategy, and how you’ll use the funds)

   2. Financial statements (Profit & Loss report, cash flow, and balance sheets)

   3. Business and personal tax returns

   4. Legal documents (business licenses, articles of incorporation, and leases)

   5. Bank statements and details of any existing debts

2. Research potential lenders and loan products: Banks, credit unions, online lenders, and government-backed schemes (such as those supported by the British Business Bank) may all have different requirements, interest rates, repayment terms, and approval times. Comparing your options will help you find the most suitable lender and product for your needs.

3. Check eligibility requirements: Many lenders have minimum conditions such as a certain number of years in business, a specific turnover, or a personal credit score threshold. So check that you meet their requirements before applying to save time.

4. Complete and submit the loan application: Provide accurate information on the form, attach any supporting documents, and double-check everything to make sure there aren’t any errors. Some lenders may allow online submissions, while others may require in-person meetings.

5. Wait for a decision: You may need to wait for a few days to several weeks for a decision. During this time, the lender will assess your:

   1. Creditworthiness (business and personal credit history)

   2. Business viability and repayment ability

   3. Cash flow and collateral (depending on the loan type)

   4. They may also request clarification, additional documents, or even conduct a site visit

6. Receive approval and funding: If your application is successful, you’ll receive a loan offer outlining the terms and conditions. Review this carefully before signing. The funds are then typically transferred within a few days to weeks, depending on the lender.

How much can a small business borrow?

Typically, loan amounts for small businesses range from as little as £500 to as much as £2 million, depending on the loan product and your business’s needs. But the exact amount your small business could borrow will vary widely depending on the type of loan, the lender’s criteria, and the financial health of your business.

Start Up Loans, for example, offer small businesses amounts between £500 and £25,000. But larger, more established businesses might qualify for loans of up to £2 million, especially if they’re applying for government-backed schemes like the Growth Guarantee Scheme. Things that can influence the loan amount include your business’s annual revenue, credit score, and whether you provide collateral.

Despite the amount you could borrow, it’s important to borrow only what you need and can realistically repay. Overborrowing can put financial pressure on your business and make it more difficult to make repayments.

Consider using tools like our business loan calculator to estimate your borrowing needs and repayment ability.

What kind of interest rates do small businesses pay on business loans?

Generally, interest rates can range from as low as 4% to as high as 30%, depending on various factors. But interest rates for small business loans can vary greatly based on the type of loan, the lender, and your business’s financial health.

Government-backed loans, such as Start Up Loans, typically offer lower, fixed interest rates of around 6%. These rates are designed to be more affordable for small businesses and startups. On the other hand, unsecured loans or loans from specialist lenders may come with higher interest rates due to the increased risk for the lender.

The loan term also affects the interest rate – shorter-term loans usually have higher interest rates compared to long-term loans.

Your credit score and financial history may also play a role in determining the interest rate you’ll be offered. A strong credit score and solid financial statements can help you secure a loan with a lower interest rate.

Since loan products differ so much, it’s smart to compare offers from different lenders to find the most competitive rates and terms for your needs.

How to improve your chances of securing a business loan?

To improve your chances of securing a business loan, you’ll need to prepare carefully and demonstrate your business’s financial stability and growth potential.

• Improve your credit score:

  • Pay bills on time to maintain a good credit history

  • Reduce outstanding debt to lower your credit utilisation ratio

  • Check your credit report for errors and address them

• Prepare a detailed business plan:

  • Clearly outline your business goals and market analysis

  • Include detailed financial projections and strategies for achieving profitability

  • Make sure your business plan is realistic and well-researched

• Check financial documents are accurate and up-to-date:

  • Maintain accurate balance sheets, income statements, and cash flow projections

  • Provide tax returns and any other relevant financial documents

  • Demonstrate a strong financial position to reassure lenders

• Consider offering collateral for secured loans:

  • Provide assets such as property, equipment, or inventory as collateral

  • Collateral reduces the lender’s risk and can improve loan terms and approval chances

Find business finance with Funding Options by Tide

Whether you’re looking for a standard business loan, a short-term business loan, or something a little more specialist, like auction finance for property developers, we’re one of the leading names in business finance in the UK, having helped facilitate over £1 billion in finance to more than 20,000 customers.

Checking if you’re eligible is free, only takes a few minutes, and while a full application would impact your personal or business credit score, checking eligibility won’t. Just submit your details via the link below to find out if you could be eligible to borrow up to £20 million.

Find business finance.

FAQs

Can I get a loan with bad credit?

While having a good credit history improves your chances, some lenders specialise in working with businesses with less-than-perfect credit. It’s worth considering these options or taking steps to improve your credit score before you apply.

How long does a loan approval typically take?

The timeline can vary depending on the lender and the type of loan. Some online lenders offer quick approvals within a few days, while traditional bank loans may take several weeks.

How can I improve my chances of getting a loan?

Make sure your business plan is comprehensive, your financial documents are accurate, and you have a clear repayment strategy. Demonstrating a strong understanding of your business’s financial health and future prospects can boost your chances significantly.

What are the alternatives if my loan application is rejected?

If your loan application’s rejected, you could consider alternative funding options such as crowdfunding, grants, or angel investors. Reviewing and addressing the reasons for rejection can also improve your chances in future applications. Check out our guide on how to finance a startup for more information.

How does the government guarantee work in schemes like the Growth Guarantee Scheme?

The government guarantee reduces the risk for lenders by covering a portion of the loan amount if you (the borrower) defaults. This encourages lenders to provide loans to small businesses that might not otherwise qualify.

Please note that the information above is not intended to be financial advice. You should seek independent financial advice before making any decisions about your financial future.

It’s important to remember that all loans and credit agreements come with risks. These risks include non-payment and late-payment of the agreed repayment plan, which could affect your business credit score and impact your ability to find future funding. Always read the terms and conditions of every loan or credit agreement before you proceed. Contact us for support if you ever face difficulties making your repayments.

Funding Options, now part of Tide, helps UK firms access business finance, working directly with businesses and their trusted advisors. Funding Options are a credit broker and do not provide loans directly. All finance and quotes are subject to status and income. Applicants must be aged 18 and over and terms and conditions apply. Guarantees and Indemnities may be required. Funding Options can introduce applicants to a number of providers based on the applicants' circumstances and creditworthiness. Funding Options will receive a commission or finder’s fee for effecting such finance introductions.