What you need to know about getting a term loan

Interest rates vary by lender to lender and by type of loan. In general, you may get a more favourable interest rate if you or your business has a better credit score, a good history with borrowing, and a stable track record of growth. Putting up collateral as security for the loan can also result in a better interest rate. 

The market can also impact the interest rate you are offered. At the moment, in 2025, the Bank of England has reduced its base interest rate to 4.5%, which could result in interest rates offered by lenders dropping. 

Repayments are usually done on a monthly basis, with the addition of interest, and can span from a few months to over a decade, depending on the agreement and loan amount. Some term loans offer the ability to pay more, or less, upfront, and funds are usually withdrawn automatically from your agreed debit account, however, it’s not uncommon to make payments via an online portal instead. 

Example: Let’s say you run a small bicycle shop. You’ve made some great revenue fixing up bicycles and offering maintenance, but many of your customers have begun asking about purchasing bicycles – expensive ones. 

You know you could sell the bicycles on, but purchasing the amount you need would make a big dent in your working capital, impacting your ability to conduct your day-to-day business. In this case, a term loan could help you secure the inventory you need without impeding on your ability to pay your current expenses. This could enable you to grow, expanding your business without running the risk of a cash flow shortage. 

Example: As another example, let’s imagine you run a large marketing agency. Much of your business comes through referrals, but recently, some of your clients have been recommending you to their peers in a geography you don’t serve. 

You know if you could open an office in this region you would have business, but it’s a big undertaking and much of your working capital is tied up in salaries, rent, and paying suppliers. If you wanted to, and if you were eligible, you could use a term loan to acquire a small local business that services the same types of clients you do to help you serve this new market. You could then spread the repayments over a long period of time as you build up your new client base.

There are several risks and concerns you should consider before entering into a term loan agreement, including the following. 

Higher interest rates for those with poor credit 

If you or your business is struggling with poor credit, you may find that you’ll face higher interest rates, stricter terms, and lower loan amounts when applying for term loans than your peers with better credit scores. You can find out more about your company credit score with Tide’s Credit Score Insights. 

Collateral requirements 

You may be asked to put up assets as collateral to gain access to the loan. These could include personal assets, for instance, your home or car. If you default on the loan, it’s possible these assets could be seized. Always consider how much you can comfortably afford to pay and do not exceed that amount. If you take out a loan with variable interest rates, consider how these rates could impact your repayment amounts if they go up, and if you would still be able to pay the loan under those circumstances.

Possible impact to cash flow 

If you don’t budget effectively in advance, it’s possible the repayments can impact your cash flow negatively, as they are new, regular payments that must be met each month, which can reduce the amount of working capital you have. Again, do consider creating a budget before taking out a loan, and if possible, put together an emergency fund that can be drawn from if needed.

Term loans are a pretty popular, common form of financing. Their key feature is that you receive a lump sum, which you repay over time in instalments. 

Other forms of funding include options such as revolving credit facilities or company credit cards. These enable you to draw from a pre-agreed pot of money, which you then repay within the month, before reusing as needed. 

There’s also invoice finance, which involves selling your invoices or borrowing against them, and there’s something called a merchant cash advance, which is when you receive a lump sum which you repay as a percentage of future earnings. If you need help finding any of these, get a quote here.

When it comes to long term loans vs short term loans, a short term business loan can be repaid within a shorter time frame, usually not exceeding a year, whereas a long term loan is repaid over a longer period. 

Long term loans generally come with lower interest rates, as a short term loan gives you less time to repay the funds, increasing the perceived risk to the lender. Long term loans are often larger in size and may take longer to finalise. Their purpose often differs also, with short term loans coming in handy during cash flow emergencies, while long term loans can help support growth initiatives.

A fixed interest rate stays the same across the loan term, while a variable interest rate can change, going up or down based on market conditions. 

Whether or not to go with a fixed or variable interest rate is a personal decision. It’s hard to say which would be “better” as you can’t predict what the future holds, but in simple terms, if you prefer a set repayment schedule that you can comfortably budget for, fixed interest rates may be better for you. On the other hand, if you feel interest rates are likely to decrease over the length of your term and are willing to risk the possibility of them increasing, a variable rate may be more suited to you.

Not necessarily, unsecured term loans are available, it’s that you might get a better interest rate if you’re open to offering an asset as collateral.

Term loans enable small businesses to effectively manage their budgets by providing a predictable repayment schedule that can be factored in when calculating future costs. Not just that, but if you work based on seasonal income, a term loan can help you cover payroll expenses and purchase inventory during low sales periods, while letting you repay the funds slowly over a year or longer.

Each lender will have their own way of calculating the repayments, but the general process goes: 

The amount you’re borrowing plus the interest divided by the loan term. 

This is oversimplified, but should give you an idea of what you may be expected to repay. 

As an example, let’s say you’re taking out a term loan worth £1,000. You’d like to repay the loan over 12 months, and the total interest you will be charged across the length of the loan is £200. In this instance, you might be asked to pay back £100 each month for 12 months.

Yes, term loans are suitable for almost any business expense or cost, making them a helpful way to cover working capital needs as well as major purchases.

Yes, it’s highly likely your history with credit will impact the loan you are offered. This is because lenders rely on historic activity to determine your likelihood of repaying a loan, and if there is more perceived risk, they generally require more reward to agree to extending funds. 

It’s possible both your personal and business credit history will be checked, depending on the type of loan you take out. 

To improve your credit history and potentially gain access to a better interest rate offering, consider paying off any outstanding debt, try not to miss any upcoming payments, keep your credit utilisation low, and start building a stable history with credit. This can be done by taking out very small loans and ensuring you repay them on time and in full, before moving on to larger loans.

Start by getting to grips with your own income patterns and expenditures. While you may experience peaks and troughs, there is likely a recurring pattern to your variations. Understanding these can help you quantify how much you can budget for when factoring in recurring debt repayments.

To repay your loan early, contact your lender and enquire. There are sometimes penalties involved. The best way to find out if you will be charged any exit fees is to approach the lender and ask. They may provide you with a settlement figure, which is the total amount required to clear the debt fully. This figure is usually valid for up to a month.

To get a term loan, you first need to check if you’re eligible, then find a suitable lender and loan option. We may be able to help you there. We’re Funding Options by Tide, a business broker that works with over 120 lenders to facilitate loans ranging from £1,000 to £20 million. To get started with a term loan, simply get a quote here, and we’ll be in touch shortly to let you know if you’re eligible.