Types of Business Loans in the UK: 12 Options Explained Simply

The phrase "business loan" covers at least a dozen different products, each designed for different situations, different business stages, and different risk appetites. Picking the right type matters more than getting the lowest rate.

A cheap loan that doesn't fit your cash flow pattern is worse than a slightly more expensive one that does.

Fixed-Rate Term Loans

The most straightforward option. Borrow a set amount, repay in equal monthly instalments over an agreed period.

How it works: You receive the full loan amount upfront and repay principal plus interest monthly for 1-10 years. The rate is locked for the entire term.

Best for: Planned, one-off investments. Equipment purchases, refurbishment, expansion costs.

Typical rates: 3.5-12% APR depending on credit profile and security.

Watch out for: Early repayment charges. Many fixed-rate products penalise you for paying back early because the lender loses future interest income.

Variable-Rate Term Loans

Same structure as fixed-rate but the interest tracks a reference rate, usually the Bank of England base rate plus a margin.

How it works: If the base rate drops, your payments decrease. If it rises, they increase.

Best for: Borrowers who believe rates will fall or who want flexibility without early repayment charges (many variable loans allow penalty-free overpayments).

Typical rates: Base rate + 3-8% margin.

Watch out for: Rate rises. With the base rate at 4.5% in 2026, a variable loan at base + 5% gives you 9.5% today, and potentially more tomorrow.

Revolving Credit Facilities

Think credit card for your business, but with better rates and higher limits.

How it works: You have an approved credit limit. Draw funds when needed, repay when you can, only pay interest on what you've used. Once repaid, the credit is available again.

Best for: Managing irregular cash flow. Covering short-term gaps between paying suppliers and receiving client payments.

Typical rates: 5-15% APR on drawn amounts, plus a small facility fee (0.5-2%) on the total limit.

Watch out for: The temptation to treat available credit as revenue. Revolving facilities should fund timing mismatches, not ongoing losses.

Invoice Finance

Turn unpaid invoices into immediate cash.

How it works: You send an invoice to a client with 30-60 day payment terms. An invoice finance provider advances 80-90% of the invoice value within 24 hours. When your client pays, the provider takes their fee and gives you the remainder.

Two variants exist: invoice factoring (the provider collects payment from your client) and invoice discounting (you collect payment yourself and settle with the provider).

Best for: B2B businesses with reliable clients who pay slowly.

Typical costs: 1-5% of invoice value per month.

Watch out for: Client perception. With factoring, your clients know you're using the service. Some view this negatively.

Asset Finance

Borrow money specifically to purchase business assets.

How it works: The asset (vehicle, machinery, technology) serves as security for the loan. If you default, the lender takes the asset. This shared risk means lower interest rates than unsecured borrowing.

Three main structures: hire purchase (you own the asset at the end), finance lease (the lender owns it, you use it), and operating lease (short-term rental, return at the end).

Best for: Purchasing expensive equipment that generates revenue.

Typical rates: 4-10% APR for hire purchase, varying for leases.

Watch out for: Being locked into assets that depreciate faster than expected or become obsolete.

Merchant Cash Advances

A lump sum repaid through a percentage of your card transactions.

How it works: You receive upfront capital. Repayment happens automatically as a fixed percentage (10-20%) of your daily card takings. Busy day? You repay more. Quiet day? You repay less.

Best for: Retail and hospitality businesses with high card transaction volumes and seasonal variation.

Typical costs: Factor rates of 1.1-1.5, meaning you repay £1.10-£1.50 for every £1 borrowed.

Watch out for: The total cost. A factor rate of 1.3 on £20,000 means you repay £26,000. The effective APR can exceed 40% because the repayment period is often short.

Bridging Loans

Short-term, high-speed loans for property or time-sensitive transactions.

How it works: Borrow large sums (typically £50,000+) for 1-18 months. Usually secured against property. Interest is often "rolled up" and paid at the end rather than monthly.

Best for: Property purchases, auction buys, development projects where you need fast capital and have a clear exit strategy (refinance or sale).

Typical rates: 0.4-2% per month.

Watch out for: If your exit strategy fails, you're stuck with an extremely expensive loan.

Government-Backed Loans

The UK government guarantees a portion of the loan, reducing lender risk.

Recovery Loan Scheme: Loans from £25,001 to £2 million with 70% government guarantee. Available through accredited lenders.

Start Up Loans: Up to £25,000 at fixed 6% for businesses under 3 years old.

Best for: Businesses that struggle to meet conventional lending criteria.

Trade Finance

Funding specifically for importing goods.

How it works: A trade finance provider pays your overseas supplier directly. You repay once you've received and sold the goods.

Best for: Import businesses that need to pay suppliers upfront but don't receive revenue until goods are delivered and sold.

Working Capital Loans

Short-term borrowing to cover day-to-day operational expenses.

How it works: Small loans (typically under £50,000) with short repayment periods (3-18 months). Quick approval, flexible use.

Best for: Covering payroll during slow periods, funding seasonal stock, or bridging payment delays.

How to Choose the Right Type

Match the loan structure to the need:

The cheapest loan isn't always the best loan. A term loan at 5% that forces you to make fixed payments during your quietest months is worse than a revolving facility at 8% that adjusts to your cash flow rhythm.

Questions? Drop us a note at hello@friedfinance.com. We read every email.