Types of Business Loans UK: Which One Do You Need?

Term loans

A term loan is the most straightforward type of business finance. You borrow a lump sum and repay it in fixed monthly instalments over an agreed period (typically 1–10 years). Interest can be fixed or variable.

Term loans suit specific, one-off investments: buying equipment, expanding premises, or funding a large project. They're available from high-street banks, challenger banks, and specialist lenders, with rates from 3–15% depending on your credit profile and business strength.

Revolving credit facilities

A revolving credit facility works like a flexible credit line. You have an agreed limit and can draw down and repay as needed, only paying interest on the amount used. It's like a business overdraft but usually with higher limits and better terms.

Revolving credit is ideal for managing cash flow fluctuations, covering seasonal dips, or having a financial buffer for opportunities. Limits range from £10,000 to several million.

Asset finance

If you need to buy equipment, vehicles, or machinery, asset finance lets you spread the cost over time. The two main types are hire purchase (HP) and leasing. With HP, you own the asset at the end; with leasing, you return it.

• Hire purchase: Pay monthly, own the asset at the end. Good for equipment with long useful life
• Finance lease: Pay monthly, return the asset. Suits fast-depreciating items like vehicles and IT
• Operating lease: Like renting — lower payments, return asset at end. Good for tech that becomes obsolete quickly

Invoice finance

Invoice finance lets you borrow against unpaid invoices, releasing up to 85–90% of their value immediately. When your customer pays, the remainder (minus fees) is released to you. There are two types:

• Invoice factoring: The finance company manages your sales ledger and collects payments directly from your customers
• Invoice discounting: You retain control of collections. Your customers don't know you're using invoice finance

Government-backed schemes

The British Business Bank supports several lending programmes that make it easier for SMEs to access finance. These include the Recovery Loan Scheme (government guarantees up to 70% of the loan) and various regional growth funds.

Government-backed loans typically offer better terms and higher approval rates for businesses that might struggle to get standard bank lending.

Choosing the right type

The best type of business finance depends on what you need the money for, how quickly you need it, and your business's financial position. A specialist business finance broker can assess your needs and recommend the most suitable and cost-effective option.

Nesto matches you with FCA-regulated business finance brokers. Get matched for free today.