Business Finance

Any successful business needs access to capital to thrive. In the UK, there are several ways to get business finance, and the right one for you depends on your needs, the size of your business, the duration you want the funds for, and several other factors. 

There are term loans, asset finance options, commercial mortgage loans, invoice finance facilities, and more. Getting the choice wrong can be a crucial mistake for your business, because lenders assess you in very different ways for different kinds of products. 

Mainstream banks in the UK prefer to lend only to established businesses with strong credit records, straightforward ownership structures, and clean financials. Moreover, they only offer products that are suited to those businesses they cater to.

But for SMEs, startups, and a vast number of businesses that may not have such strong financials and creditworthiness, there are specialist lenders who are willing to offer them the right products. The only problem is that they’re not as well recognised or easy to access.

At ABC Finance, we are a whole-of-market broker who understands the nuances of business finance and can match you with the best products and providers for your needs, be they working capital facilities, term loans, or complex structured products.

What is Business Finance?

Businesses need capital, and funds aren’t always available to finance operations. It could be a huge capex investment that cannot be funded purely from your own cash flows. It might be a working capital shortage because you’re waiting for your customers to pay you on a 60 to 90-day credit cycle. In all of these situations, there are funding tools and strategies that can help you meet the requirements without harming your core business. These products are collectively called business finance.

Business finance covers both debt and equity finance, as well as long and short-term capital management. But in the UK, it most commonly refers to external debt financing, which includes credit facilities, loans, and other structured finance products. There are several providers who offer these products, ranging from mainstream banks to specialist lenders, fintech startups, and even government-backed schemes.

Key Definitions and Scope

In the UK, business finance is spread over a wide spectrum of products. On the one hand, there is unsecured lending in the form of overdraft facilities and term loans. This market is usually catered to by the high-street banks like NatWest, Barclays, HSBC, and Lloyds Banking Group. On the other hand are complex products like asset-based lending, trade finance, development finance, and mezzanine debt. These products lie in the domain of specialist lenders.

There are many factors to consider when choosing the right product for your business. For example, how long do you need the money for? What are the income streams that will support your repayments? What is your current credit profile, and what is the quality of your assets? Answering some of these and more questions can help you make the right decision for your business. 

Why Do Businesses Seek Finance?

Finance helps businesses bridge the gap between cash outflows and inflows. 

For example, a machine may produce thousands of pounds of revenue inflow in five years, but currently, it is a large capital outflow for the business. Similarly, your customers are going to pay your last invoice in the next 90 days, but you need cash now to start producing for the next quarter. In such situations, finance ensures business continuity and growth.

Key Scenarios Where Finance Helps

Here are some common examples of why companies may need finance.

Working capital management

Working capital is the money that is used for day-to-day operations in a business. Often, due to credit cycles, seasonality, or large orders, businesses face a cash shortage, which means they are unable to service their debts, pay their employees, and fulfil other monthly expenses. To tide over the temporary cash crunch, many small businesses use personal savings, personal loans, and credit cards, all of which are expensive and needlessly burdensome means to satisfy a basic business need. Instead, invoice finance and revolving credit facilities can offer the necessary cash flow to keep operations running smoothly at relatively low expense and without endangering the personal wealth of the owner.

Growth and expansion

Launching a new product, starting a new line of business, entering a new market, and opening a new store are all part of business expansion. Each of these activities requires money while producing no immediate return until at least some time in the future. But businesses still need to grow, so they use products like term loans and equity investments to fund these activities. 

Asset acquisition

Buying a new machine, acquiring a set of vehicles, or setting up an innovative new technology in your business can help you grow faster than your competitors. But again, there is no immediate return on investment that can fund these costs. Asset finance can help bridge the gap between asset acquisition and return on that acquisition. The debt gets spread out over the life of the asset, while using the asset itself as collateral and preserving working capital for other purposes.

Project funding

Several businesses are fundamentally project-based, for example, construction, property development, and so on. These businesses need finance that is provided in stages as and when milestones are achieved in the project, instead of acquiring lump sum amounts and then paying interest over all of it. Development finance provides the right product for this requirement.

Resilience and risk management

Sometimes just having a facility to draw upon is itself an important aspect of business continuity. Unexpected events like wars, floods, and other natural calamities can happen that can derail the entire course of your work over which you have no control. In such situations, the ability to get funds quickly and resolve the crisis is critical.

Refinancing

As businesses get older, their financial history gets stronger, their credit profiles become better, and thus they are able to afford better credit facilities than they would have gotten earlier. In such cases, refinancing can help reduce the cost of debt and help enhance cash flow over the medium term.

Types of Business Finance in the UK

There is a wide variety of products available in the business finance market in the UK. Here is a brief synopsis of the major ones.

Working Capital Finance

Working capital finance helps manage short-term gaps between cash inflow and outflow. The three main types of working capital finance are business overdrafts, revolving credit, and merchant cash advances.

An overdraft facility is a product that lets you draw down money at a fixed interest rate and up to a certain limit as and when required. Interest gets charged only on the amount drawn, and stops being charged once the facility is no longer in use. It’s a cost-efficient and simple way of managing variable cash flow. 

A revolving credit facility is a similar product, but the drawdown limits are higher, and the terms are more flexible. It is usually offered only by specialist lenders. The business can keep withdrawing and repaying the funds as long as the facility is available to it, making it a perfect tool for seasonal firms.

Term Loans 

A term loan is perhaps the best understood product in business finance, because it mirrors the same product that is available to retail customers as well. It is simply a lump sum amount offered to the business to be repaid within a fixed period through monthly payments.

Term loans are often used for one-off purchases such as buying equipment, land, or machinery.

Term loans can be either fixed-rate or variable-rate. If the rate is fixed, the monthly repayments remain the same throughout the loan term, whereas for variable rate facilities, the repayments can vary depending on the prevailing base rate of the Bank of England.

In the UK, unsecured business loans typically have interest rates between 6% and 15%, though they can be higher depending on the borrower’s profile. The government also offers a Start Up Loan scheme, which provides unsecured loans up to £25,000 at a fixed rate of 7.5% for businesses younger than 36 months. 

For businesses with strong financials and a good credit history, unsecured loans with APRs between 7% – 12% are not uncommon, while for secured lending, the rate can go even further down to 5%-9%.

Here is a summary of current rate ranges by product and borrower profile as of May 2026:

Product Type	Rate Range	Typical Term	Security Required
Unsecured term loan (clean credit)	7% – 12% APR	1 – 5 years	No
Secured term loan	5% – 9% APR	1 – 15 years	Yes
Government Start Up Loan	7.5% fixed	1 – 5 years	No
Business overdraft	Base rate + 2–4%	Revolving	Sometimes
Asset finance (hire purchase)	5% – 10% APR	1 – 7 years	Asset itself
Invoice finance	Base rate + 1.5–3.5% + service fee	Revolving	Invoices
Commercial mortgage	5.5% – 8.0%	3 – 25 years	Property

Rates are indicative as of May 2026. The Bank of England base rate is 3.75%. Actual rates depend on individual business profile, sector, and lender criteria.

Invoice Finance (Factoring and Discounting)

Businesses that normally run on credit cycles, such as wholesalers who sell to retailers and get the amount 30, 60, or 90 days later, often find themselves in a cash crunch due to this gap. Invoice financing is a product that elegantly solves this problem.

Invoice finance lets businesses claim as much as 80%-95% of their unpaid invoices within 24-48 hours after they are raised. The remaining amount is provided after the payment is received from the customer, after subtracting the provider’s fee.

The fee carries two components. There is a service charge, usually between 0.1% and 3% of the firm’s annual turnover, and then there is a discount charge, or interest, that is charged daily on the facility provided for the duration till the payment is received from the customer. The discount charge is usually a variable rate, typically the Bank of England base rate plus 2.5%.

Invoice Finance can be done in two ways: there is factoring, where the entire process of collection from customers is taken over by the provider. This may be more appropriate for smaller firms whose credit control processes are not very strong. For larger firms with more established processes, there is Invoice discounting, where the provider only offers the facility, and not the credit control services. Factoring is more expensive than discounting.

Invoice finance offers a better solution than overdraft or personal loan facilities for plugging cash flow gaps in businesses.

Asset Finance (Leasing and Hire Purchase)

When making a large purchase like a new machine, technology, vehicles, land, and so on, the upfront cost involved can be a limiting factor for businesses. Using personal loans or unsecured credit facilities to fund large asset purchases can be very expensive. 

Asset finance offers a way out. In this type of facility, the asset being acquired itself becomes the security for the loan, thus bringing down the lender’s risk and consequently the cost for the borrower.

Asset finance can be structured in broadly two ways, depending on what happens to the asset at the end of the term. A hire purchase agreement involves the borrower paying a monthly repayment of capital and interest, so that at the end of the term, the asset’s ownership is transferred to them. 

In leasing, the business only pays a fixed monthly fee for the use of the asset during the tenure, at the end of which the ownership remains with the provider.  One form of leasing is an operating lease, where the residual risk of the asset also remains with the provider. This is particularly useful in industries like IT, where hardware can become obsolete very quickly.

Trade Finance and Letters of Credit

Businesses that trade internationally often face a very long gap between paying for goods and getting them. This creates working capital issues that can last for several months on end. Trade finance is a suite of products that caters to this need. 

Instead of paying upfront and awaiting goods for several months or vice versa, a bank issues a letter of credit guaranteeing a seller that the buyer will pay the required amount once delivery and documentation have been received. This reduces risk at both sides, enabling trade between parties that may not have a credit history with each other.

Another product is supply chain finance (or reverse factoring). This lets buyers offer payment terms to suppliers, even as the supplier gets their payment from a provider.

Development Finance and Mortgages

Property development is a project-based business, where each project runs in various stages. A fresh infusion of money is required at each stage, rather than as a lump sum at the beginning of the project. Development finance provides the perfect solution for this industry. It lets property developers draw down money from a facility as and when each stage is completed, thus not burdening them with repayment of the entire amount from the beginning of the project. The actual repayment happens at the end of the project when the property is either sold or refinanced.

Commercial mortgages are long-term loans that use commercial property as collateral. The property could be either owner-occupied, in which case the loan terms are based on the value and prospects of the business, or it could be held as an investment, where the terms are evaluated by the income-earning potential of the property.

How to Compare Finance Options

With such a wide array of financial products available, businesses need to adopt a structured approach towards selecting the right option for themselves. Here are some factors to consider.

Costs, Terms, and Eligibility

Total cost of capital 

Providers often highlight the headline rate or interest rate for their product. But the true cost of borrowing also involves various fees, such as legal fees, valuation fees, monitoring charges, arrangement fees, and even early repayment charges. 

Therefore, when asking for a facility, always check what your total cost of borrowing is going to be on a like-for-like basis with other available options. For continuous and revolving facilities, it is better to ask your provider to model the entire cost of borrowing over a fixed period, such as a full year, before making any commitment.

Repayment flexibility

You may think that early repayment of your obligations would minimise your total cost by cutting down the interest component to be paid. But providers often add on an early repayment charge, which can significantly alter the equation. 

Similarly, you might not consider the extra cost of overpayment of the facility, but the provider could have added a huge margin for extending it, even if you are borrowing a small amount over the actual drawdown limit. In either case, having flexibility in your debt can be invaluable.

Covenants

Business loans often come with covenants from the provider. These are requirements for the business to maintain certain financial ratios, such as debt-to-EBITDA and minimum interest cover. The idea is to ensure that the business remains financially sound and able to repay the loan. However, breach of covenants can incur a major penalty, or even a review of the entire facility, despite making all payments on time. Therefore, always check the covenants before accepting any offer. 

Eligibility

Getting your application for a business loan has serious consequences on your credit rating, so it is important to consider the eligibility criteria for the lender you are applying to. Different providers use different yardsticks for measuring various business parameters. 

For example, while a trading history of six months might be acceptable to one provider, another might reject your application simply because your trading history is less than 24 months. Similarly, there are sector-related restrictions and minimum turnover requirements that some lenders follow. It is best to research every provider’s eligibility criteria thoroughly before applying.

Risk and Regulatory Protections

Any lending carries some risk with it. In the case of secured loans, the risk is that of repossession of the asset against which the loan is secured. Unsecured loans are often provided against personal guarantees from business directors, which makes them directly liable in case repayments are not done timely.

In the UK, all regulated lenders must comply with FCA requirements. They are bound by law to ensure affordability, transparency, and fair treatment for all applicants. However, there are some unregulated products, such as some types of short-term business finance. These carry fewer protections and should be avoided. 

Application Process and Checks

Understanding the application process and what checks lenders perform is the best way to get your application approved on the first go.

What Lenders Look For

Among the key things that providers consider is the trading history of the business. A long-standing business with a demonstrable track record is the most important factor for most lenders.

Financial performance, especially things like cash flow availability, net profits, and overall turnover are equally important. The lender tries to ascertain whether the business is capable of repaying the loan from its current operations. A Debt Service Coverage Ratio (DSCR) of 1.25 or more is a strong positive for your loan application. The ratio indicates that your average income is at least 1.25 times the debt obligation.

Again, credit history is very important. For SMEs, the providers even look at the personal credit history of the directors. Lastly, sector and business type can also be deciding factors in a loan application.

Typical Documents Needed

Most lenders require two to three years’ balance sheets, profit and loss statements, and cash flow statements, audited and signed off by an accountant.

If your business trading history is less than two years, you might have to add supporting documentation like bank statements and management accounts.

For self-employed directors or sole traders, the SA302 and tax year overviews are required, along with bank statements from the last three to six months.

Increasingly, lenders are using Open Banking to access these details, so all that is needed is consent from your side. In the case of secured lending, the lender will require proof of ownership and valuation of the property or asset. For invoice financing, a sample aged debtor ledger with outstanding invoices is usually requested. 

For more complex applications or new businesses and startups, a business plan with a management summary is also required.

Regulation and Credibility

FCA and Protected Lenders

In the UK, there are two types of business lending products: regulated and unregulated. 

Regulated products come under the governance of the Financial Conduct Authority (FCA). These include secured commercial mortgages, consumer credit, and some types of hire purchase agreements.

The FCA has laid down strict guidelines for regulated lenders to ensure transparency, fairness, and affordability assessment for all applications. Apart from this, there are processes for grievance redressal, such as the Financial Ombudsman Service (FOS), where independent resolution of disputes can be handled.

However, most business loan products like invoice financing, trade finance, unsecured business loans, and commercial mortgages do not come under the FCA regulatory framework. While this does not mean that these products are unsafe, the statutory protections offered under regulated products are not automatically available for them.

Most providers are registered under the FCA Register, which you can check from register.fca.org.uk to confirm. For brokers, you can check if they are credit brokers (ie, they work with a lender panel) or a lender themselves. All brokers need to disclose this under FCA rules.

For loans involving government schemes, the British Business Bank plays an important role, including ensuring that only accredited lenders are allowed to offer the scheme. Loans offered from accredited lenders are partially guaranteed by the government, which reduces the lender’s risk, letting them offer loans to even those applicants whom they might have rejected otherwise.

Industry-Specific Guides and Case Studies

The kind of business loans to choose from also varies by sector. Here, we have considered four major sectors and the type of business financing that is most relevant to them.

Healthcare, Construction, Manufacturing, and Renewables

Healthcare

Medical practices, pharmacy groups, dental practices, veterinary businesses, and care homes all come under the healthcare sector. This sector is highly regulated; only specialist lenders who understand the nuances of this business operate here.

Lenders understand the kind of due diligence needed for Care Quality Commission compliance required from businesses that operate in healthcare. Moreover, they also understand the cash flow profile of NHS and private patient incomes. 

Explore further: British Business Bank — Healthcare Case Studies

Construction

Construction businesses operate on long contract cycles, which puts tremendous working capital pressure on them at all times. They need invoice finance, especially finance against specific contracts with a revolving credit facility.

For those companies that are operating in the property development sector, there is development finance. For larger contractors, there are performance bonds and contract finance.

Explore further: FMB — Construction Finance Guide

Manufacturing

Manufacturing firms often need to acquire new plants and machinery, for which they need asset finance. They also use stock finance when a large part of their working capital gets tied up in stock. 

Explore further: British Business Bank — Manufacturing Case Studies

Renewables

This is a specialist and booming sector that has come up in recent years. The UK government’s energy transition efforts have been driving demand for growth in the sector, which has led to a plethora of financial products designed specifically for them. This includes project finance, green loans, and government-backed energy efficiency schemes.

Explore further: UK Export Finance — Renewables Case Studies. 

At ABC Finance, our dedicated panel of experts helps firms in each of these sectors assess their finance needs and suggest the right products and providers that are best suited to them.

Tools and Calculators

Business Finance Calculator

Before applying for a business loan, it is important to have a clear understanding of your affordability, the total cost of borrowing, and how different scenarios might impact your monthly cash flows.

A business finance calculator is a tool that lets you enter how much you wish to borrow, for what term, and at what rate you are expecting to borrow. This lets you model various scenarios of monthly payable amounts and work out the best option for you.

Our business loan calculator will help you work out various scenarios for your own firm.

As an example, here is a sample scenario analysis of various loan amounts at different terms, assuming a 9% APR.

Loan Amount	Term	Monthly Payment	Total Repayable	Total Interest
£25,000	3 years	£795	£28,620	£3,620
£50,000	5 years	£1,038	£62,280	£12,280
£100,000	5 years	£2,076	£124,560	£24,560
£250,000	7 years	£3,966	£333,144	£83,144
£500,000	10 years	£6,333	£759,960	£259,960

While using the calculator, pay close attention to the total interest figure, rather than just the monthly amount to be paid. A longer term can reduce your monthly outgoings, but might end up causing the overall amount to go up.

For example, on a £100,000 loan at 9%, increasing the term from five to seven years causes the monthly payment to reduce from £2,076 to £1,596, but ends up increasing the total interest from £24,560 to £34,064. 

The objective should be to balance affordability with total cost.

Brokerage vs Marketplace: When to Use Each

There are three main ways to approach lenders: directly, through a broker, or through an online marketplace. Here we discuss the benefits and disadvantages of each of these approaches.

Choosing the Right Route for Your Needs

Direct to lender 

This is the simplest way to secure funding. If there is an existing banking relationship, securing finance is relatively straightforward from your own bank. Mainstream lenders offer competitive rates to their existing customers, and the process usually goes through smoothly because less paperwork is required. The limitation of this approach is that you do not get to compare the multitude of options available in the market, thus causing you to miss out on possibly more advantageous offers. Moreover, a direct application, once rejected, can cause harm to your credit profile.

Online marketplaces

Recently, online marketplaces like Funding Options, Capitalise, and iwoca have emerged that let you submit a single application to several lenders at one time and receive multiple offers. This broadens the range of offers you can get for your firm. However, the drawback is that there is no personalised advice that helps you decide the right product and lender who will be best for your needs. Online marketplaces might limit you to only their panel of lenders, and if you have a complex case, such as bad credit or a specialist sector, these marketplaces will not be able to help you.

Specialist brokers 

Whole-of-market brokers like ABC Finance offer you the best of both worlds. You get access to a broad panel of lenders who will work with you as per your particular needs, including for complex cases where there is adverse credit or complex business structures. Moreover, you get personalised advice that helps you help you compare and choose the best product and provider for your needs. 

Glossary and FAQs

APR (Annual Percentage Rate): This is the actual cost of borrowing, after considering the interest rate and all mandatory fees. 

Asset finance: It is a type of business finance where you can finance an asset by making it the collateral for the loan. Often used for acquiring machinery, equipment, and vehicles across industries.

DSCR (Debt Service Coverage Ratio): It’s a ratio that measures the ability of a business to service its debt obligations. A DSCR of 1.25 means that for every £1.00 you owe, your business is able to generate £1.25 of income.

Invoice finance: A facility that lets you access 80%-95% of your invoice amount almost immediately after raising invoices, without having to wait for your customers to pay them as per their credit terms.

Personal guarantee: Directors are often asked to provide a personal guarantee as a way for the lender to reduce their risk while lending to a firm. This is especially important in SME and startup lending.

Growth Guarantee Scheme: A scheme run by the UK government where the British Business Bank guarantees a part of the loan given to SMEs by accredited lenders. This reduces the risk of the lender, enabling them to cover smaller businesses that would otherwise not be able to access funding easily.

Frequently Asked Questions

What is the difference between a business loan and a business overdraft? 

Business loans let you borrow a certain fixed sum for a predetermined term, to be paid back in regular instalments. On the other hand, an overdraft is a flexible facility where you can draw down as much as you need and then repay it, with interest charged only for the duration during which you accessed the facility. Once the drawdown is repaid, you can access the facility again. Loans are best suited for one-off needs, whereas overdrafts are better for ongoing working capital management.

Can I get business finance with bad credit? 

Yes, it is possible to get business finance with bad credit. There are specialist lenders who are willing to consider such applications on a case-by-case basis, though usually for higher APRs in the range of 25-40%. The rates can be brought down by using a secured facility. There are other products that are better suited for this scenario, such as invoice finance, where the ability to borrow is determined more by the quality of your customers rather than your own credit standing.

How long does a business finance application take? 

The time taken to get a business finance application approved depends on the product and the strength of the application. Unsecured loans with good credit standing often get approved within 24-48 hours, invoice finance applications take 1-2 weeks for approval, asset finance usually gets approved within 1-2 weeks, and secured lending/commercial mortgages take up to 4-8 weeks, because of the additional asset valuation and legal work required.

Do I need a business bank account to apply? 

Yes, business bank statements are required as part of the application process of most lenders, except for absolutely fresh startups. The government’s Start Up Loan scheme may let funds be deposited directly into your personal account in some cases.

Next Steps and Getting Started

Before going ahead with your business finance application, the first step is to be prepared. 

Use our ABC Finance business loan calculator to create various lending scenarios as per your needs. Check the repayments depending on the loan amount, term, and interest rates.

Then, access our product guides to understand various products available in the business finance world, such as our invoice finance page, asset finance page, commercial mortgages page, development finance page, and more.

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The rates and figures shown in this article are for informational purposes only and do not constitute financial advice. Business finance rates change frequently and will depend on your individual business profile, sector, and the lender’s criteria at the time of application. For a tailored assessment, speak to our team at ABC Finance.