A complete guide to UK business loans

If you’re looking to grow your business at pace, you’ll likely need some financial support to help you achieve your milestones. Whether it’s expanding into new regions, investing in new long-term opportunities, buying new stock or machinery, or acquiring land or property – whatever your next ambitious project is, getting funding in place early on can help turn it into a reality.

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Depending on your sector, long term goals and future business plans, there are a few different options available in terms of business financing – but finding the right business loan for you can be tough – especially if you’re new to the process.

Many small to medium-sized businesses are frustrated with the financing process, finding it confusing, difficult to understand – and often, a waste of their time. This is compounded by the reluctance of high street banks to lend flexibly to them, typically only offering a small range of cookie-cutter products that aren’t fit for purpose.

Now, however, new perspectives on lending have arrived in the form of challenger or neobanks that leverage digital technology and granular data insights to take a forward-facing view. Data from the British Bank shows that in 2021, these challengers, or specialist neobanks, provided more than half of the total lending to small-medium sized businesses.

This renewed approach to lending has given way to a wider range of specialist loan facilities that are tailor-made for businesses, giving them the best chance to succeed. At OakNorth, we understand that different businesses have unique needs, timelines, and growth plans, so one size doesn’t fit all – especially when it comes to financing.

To help businesses just starting off on their financing journey, or those that have only borrowed from more traditional high street banks, we’ve outlined what a business loan is, what it can be used for, and some of the more specialist loan types on offer in the UK in 2022.

What is a business loan?

A business loan is a sum of money that is lent to a business and is paid back over an agreed time period. It’s different to a financial investment, where an investor, or investors, provides a sum of money in return for a percentage of the business.

A business loan must be used for business purposes, for example, buying a new property to turn into a restaurant or hotel or acquiring a new business.

Just like personal loans, business loans vary from lender to lender, and they depend mostly on what they’re being used for. This is helpful for the business borrowing the money, as the loan can be tailored specifically for their present and future needs.

See our business loans

What are the different types of business loans available in the UK?

Business loans are commonly split into two main categories – secured business loans and unsecured business loans.

 

Secured business loans

Secured business loans require the borrower to secure the money they lend against something – usually assets or collateral such as commercial property, vehicles or machinery, or, in some cases, a liquid asset such as cash. These loans are sometimes referred to as commercial mortgages or business mortgages, as they work in a similar way.

It’s common for a business to use the asset they are buying with the borrowed money as security. For example, if a business requires capital to buy a property for a new pub, restaurant or hotel, the lender can take that asset as a secondary source for repayment if the business was unable to repay the loan with its cash flow.

As the lender has something to secure their money against, secured loans can sometimes be safer for both parties. In most cases, secured loans will have both a longer repayment profile and tenure.

There are a lot of benefits of secured loans, some include:

Higher loan amounts: Because the lender has the asset as security their loss risk is mitigated as the asset can be sold to repay the loan

Long-term loans: Because the loan is secured against something, like a buy-to-let property, the period to pay it back can be a lot longer

Lower interest rates: In case of a loss or default, the lender’s expected loss is lower, compared to unsecured loans, as they can sell the assets to recuperate the debt

Not reliant on credit history alone: Having an asset to secure funding against means there may be less emphasis on a business’ credit history in isolation

Secured business loans refer to a wide range of debt finance options, which can be highly specialised or niche. The security element is part of the wider eligibility criteria which allows lenders to assess the risks attached to the loan if a business could not meet the repayment plan.

 

Other things to know about secured business loans

Secured loans often require the lender to take a ‘first charge’ on the asset or collateral that the loan is guaranteed by. It’s a legal contract that gives the lender:

1. Priority over any other party that has a lower ranking charge on that asset
2. Priority over any other lenders or creditors

First charges are common for bridging and property or property development finance where there is a senior lender and then a secondary lender – although there doesn’t always need to be more than one lender for a first charge loan. Think of the first charge as the legal right for that lender, above everyone else, to sell the asset in the default event to recover the money they’re owed fully, or partially.

If a borrower needs more debt, they can take out a second charge loan. This second charge loan is only repaid after the first charge debt is repaid – this makes the second charge riskier for lenders, so they often come with higher interest rates. Typically, a first charge lender will need to provide consent to the other lender taking out a second charge on the asset.

First and second charges are typically executed by a borrower’s legal team, or a third-party legal team, so they can incur added up-front costs.

 

Unsecured business loans

The term unsecured loan can mean different things to different lenders. There are two main definitions that are used in the industry:

Completely unsecured lending: A loan that is not secured by any assets or collateral. This can be riskier for both parties because if the borrower cannot repay the loan, their business would need to be sold as a ‘going concern’ to repay the outstanding debt.

Lending not backed by tangible assets: Loans that are not secured against tangible assets but are secured against a business’ cash flow and the agreed loan covenants.

To mitigate the risk, often unsecured loan providers will provide lower amounts, over a shorter time period. And, because they’re riskier for the borrower, unsecured loans can often come with higher interest rates.

Both unsecured loans and secured loans may require covenants and a personal guarantor. A guarantor is someone that signs an agreement with the borrower, stating that if the business is unable to repay its loan, they will personally take on the outstanding debt. This is important for lenders as they need to mitigate their risk of loan defaults and losses.

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With flexible debt facilities from £250k up to tens of millions, work with a funding partner that knows what it takes to succeed. Find out more about our range of business loans today.

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What are loan covenants?

Loan covenants are a set of terms and conditions requested by the lender and accepted by the borrower, should they wish to take on the loan. They’re used to provide transparency between the two parties and to prevent default events from happening.

Usually, covenants are put in place to ensure that the business is acting responsibly to maintain healthy operations and cash flow. There are three main types of covenants used in business loans:

 

Affirmative

Affirmative covenants are terms that the borrower needs to fulfil to show they are running their business effectively and congruous with the law. Examples of affirmative loan covenants are:

  • Submitting update financials and bookkeeping records each month
  • Agreeing to regular site visits
  • Maintaining the adequate insurance levels
  • Conducting frequent audits and sharing the findings

Additional debt limitations: This provision restricts the business from taking on added debt without prior consent

Capital expenditure limitations: These terms put a maximum cap on the business’ capital expenditure for a fiscal year

Shareholder payment limitations: This means that the business may be capped on how much it pays its shareholders before it has paid off the debt owed

 

Negative or restrictive

Negative loan covenants are the opposite to affirmative in that instead of stipulating what a borrower must do, they outline what they cannot do. Much like affirmative covenants, negative covenants are put into place to protect the lender from a default event by enforcing good business practices. Some examples of negative loan covenants are:

Fundamental change limitations: These stop the borrower entering any transactions that significantly alter the business’ operations and business plans – e.g., mergers and acquisitions, or the selling of assets, without prior consent

Additional debt limitations: This provision restricts the business from taking on added debt without prior consent

Capital expenditure limitations: These terms put a maximum cap on the business’ capital expenditure for a fiscal year

Shareholder payment limitations: This means that the business may be capped on how much it pays its shareholders before it has paid off the debt owed

 

Financial

The third most common type of covenants are financial covenants. While the other two types focus on the actions of the borrower; financial covenants place more responsibility on the lender to avoid a default event.

Financial covenants require the lender to closely monitor the cash flow of a business by requesting its monthly financial statements or checking the levels of spending across the business’ operations.

Some examples of financial covenants are:

Debt to equity ratio: How much of the business’ income is from debt vs its own equity

Loan to value ratio: The debt amount vs the market value of the asset securing the loan

Cash flow: The amount of money being transferred in and out of the business which changes its overall liquidity

EBITDA: A business’ earnings before interest, taxes, depreciation and amortisation – essentially a measure of its overall financial performance

Interest coverage ratio: A ratio using debt and profitability to decide how easily a business can pay the interest on its outstanding debt

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What do lenders use to assess the risk of an unsecured loan?

Finance that isn’t backed by collateral often relies on a business’s cash flow, trading history, credit history and profits. It’s usually thought that because there are no assets involved there are fewer legal fees, and the financing process is quicker. However, in a lot of cases, unsecured loans undergo a similar process to secured loans in terms of the legal steps, as the lender needs to undertake financial due diligence and the negotiation of covenants.

Who are unsecured loans for?

Unsecured loans are often used by businesses with fewer physical or tangible assets. For example, technology businesses that offer software as a solution (SaaS) and want to expand or kickstart their growth but don’t have properties or other physical assets to put forward as security.

Secured loans and unsecured loans can be used for similar things. The main difference between the two types is the risk, the cost of the loan, the repayment profile and the loan amount. Some business activities that unsecured loans can be used for are:

  • Management buyouts
  • Mergers and acquisitions
  • Investing in new business assets
  • Buying new stock and business supplies
  • Working capital

Experts in your sector

Ready to fund your next hotel, pub or restaurant? Looking for working capital to expand your team? Found the perfect acquisition opportunity? We’ve worked with experts like you, in your sector, ready to take the next step.

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There are a few different types of business loans on offer in the UK– we’ve listed some of the more popular types below. A lot of these loans can be both secured and unsecured, depending on the risk profile of the business, the loan amount and loan purpose.

 

Term debt or revolving credit facilities

As mentioned, business loans are often grouped into different broad categories, like unsecured and secured. Another loan category is term debt. Term debt is a loan taken out over an agreed time period – for example, five years – this is known as the loan term. The debt is then paid back in regular instalments with added interest over the course of the term.

Term debt is like another loan category called a revolving credit facility, also known by its acronym ‘RCF’. Revolving credit facilities are flexible lines of credit that allow businesses to withdraw, repay, and then withdraw funds again across an agreed time period.

Some examples of loan types that can be term debt or revolving credit facilities are:

 

Asset-backed loans

Also known as asset-backed financing, asset-backed security, or invoice financing, is a specialist form of secured lending where the loan is tied to the assets on your balance sheet – for example, cash flow, stock and equipment or machinery.

 

Bridging loans

Used to ‘bridge the gap’ and provide liquidity for business owners, while they’re waiting for the sale of a property, or another business, to go through. Bridging loans are a fast source of capital ideal for helping entrepreneurs buy new businesses in a short time frame.

 

Capital expenditure loans

Finance used for maintaining, upgrading, or acquiring new physical assets which will create long term value for the business.

 

Capital call facilities

A specialist loan type designed for the private equity sector to provide investors and fund managers with the finance they need for a capital call on their funds.

 

Development finance

Also known as property development finance these are a specialist loan type to support new build projects or refurbishments of old buildings. The loan is used to fund the build project and repaid through the sale of the property or refinanced to a residential or buy-to-let mortgage. If the borrower is building a hotel, care home or nursery, or any other operational real estate property, they can refinance onto a trading business loan.

 

Fixed term or floating rates

Another way to categorise loans is by their interest rates. There are two broad types: fixed term, or fixed rate loans and floating rate loans.

Like the name suggests, fixed rate loans have a fixed interest rate across the entire term. Floating interest rate loans have rates that can increase or decrease over the loan term.

Floating rate loans are tied to a reference rate throughout the duration of the loan term. The total interest rate is calculated using the margin, which is usually constant and the reference rate which can fluctuate.

Some examples of specialist loans that can be fixed term or floating are:

 

Mezzanine debt

A second loan taken out when a business needs more capital than provided by their first lender. It’s usually taken as a second charge over a property or asset, which means if the business fails to repay the borrower is second in line (behind the first lender) to get the proceeds from the sale of the asset – this makes it riskier and therefore more expensive for businesses.

 

Business overdraft

Similar to a personal overdraft, a business overdraft is a direct line of credit linked to your business account. It’s a short term cash flow solution that allows you to make payroll, pay suppliers and maintain day-to-day options. They can be both secured and unsecured.

 

Trading loans

Used commonly by manufacturers or wholesalers, trade loans are usually short term loans that provide cash flow in between a business’ trading cycle.

See our business loans

Fast, flexible finance on your terms

Whether it’s a revolving credit facility, working capital, a bridging loan, or term debt you’re after, we can custom create finance for your future. See our business loans to find out more. Or get in touch via our online form.

See our business loans

What types of business loans does OakNorth offer?

Unlike other banks, OakNorth wasn’t founded by bankers. We’re founded by entrepreneurs. This means we know the pains of growing businesses. We know that in the UK, there’s a huge pool of determined business owners, that are the backbone of the British economy – and they’re underserved financially. They’re offered outdated ‘one-size-fits-all’ solutions that are opaque, convoluted and time-costly.

So, we’re doing things a bit differently. We offer straightforward secured and unsecured business loans, tailored specifically for high growth businesses across multiple different sectors.

We only offer debt finance, starting from £250,000, up to tens of millions, so you get to keep full control of your business by paying back the loan amount in full with interest.

Depending on what you need your finance for, we can custom build a loan facility on your terms. Typically, we can offer:

 

Loan facilities that follow the full life cycle of an asset

We can provide one loan facility that can fund each step of your new project or development. That means instead of wasting time and money refinancing for each step of your plan you can crack on with the things that matter.

 

Umbrella facilities for ongoing projects

Umbrella loan facilities can be used as a preapproved credit line for investors to build or grow their portfolio of assets by taking on acquisitions or buying and building new development projects.

 

Capital expenditure

We offer capital expenditure financing for businesses looking to add value by investing in the improvement of their business or a newly acquired one.

 

Flexible loan terms

Although our loans are secured, we’re not blinkered by certain types of assets, and we won’t blindly rule out others. We want to partner with trailblazers ready to launch the next big thing.

 

Capital call facilities or subscription lines

We have a strong track record of providing experienced fund firms, including RM Funds, and BlueGem Capital Partners with capital call facilities (also known as subscription lines, drawdowns or a capital commitment) to finance new investments.

 

Working capital

We offer working capital finance to help your business maintain operations and provide the necessary cash flow for growth. For example, revolving credit facilities (also known as RCFs or revolving lines of credit) let borrowers draw down money, repay it then withdraw it again, as, and when needed.

 

Net asset value (NAV) financing

For businesses looking for fund financing, we can offer net asset value (NAV) facilities that provide liquidity to invest in exciting opportunities and broaden asset profiles.

 

Bridging loans

Ideal for property developers with short term liquidity needs, we provide fast and transparent bridging loans to help with the acquisition of new assets.

 

Development finance

We’ve helped property developers finance their next buy and build projects. We’ve partnered with ambitious entrepreneurs that buy and refurbish old buildings, helped family-run house builders build and run buy-to-let sustainable housing, and allowed investors to expand their property portfolios with our specialist property development finance.

What are the eligibility criteria for an OakNorth business loan?

Different lenders and different loans have different criteria. At OakNorth we create bespoke finance options that help entrepreneurs jumpstart their next growth or expansion project. For example, a property developer may have an asset that needs funding, so we’ll tailor a suitable facility based on a project-by-project basis.

And when it comes to decision making, we won’t hide behind our credit team – in fact, for loans above a certain size, you’ll be invited in to meet our Credit Committee. We also use intelligent tech to analyse granular data at speed, making our forward-looking approach fast and reliable.

We’re transparent about the financing process. We’re also responsible borrowers so we must make important decisions that protect businesses, create jobs, and positively contribute to communities. When applying for a loan with us, here are a few things we look for:

Amount
Our focus is on businesses with mid-long term growth plans, so we provide loans for £250,000, up to tens of millions.

Experience
We’re backing the brightest business owners across UK regions. We want to see high streets flourish and job opportunities arise, so we want you to know where you’re going and what value our financing can add.

Trading history
How long your business has been trading in the UK.

Profitability
How profitable your business is, based on your trading history.

EBITDA
We typically lend to businesses with earnings before interest, tax, depreciation and amortisation (EBITDA) of over £250,000.

Loan to value (LTV)
Loan to value is a common ratio used by lenders to assess the risk profile of a facility.

Loan to cost (LTC)
A ratio calculated by dividing the loan amount by the cost of the project – typically used for commercial real estate deals. The higher the loan to cost ratio, the riskier it is for the lender.

Loan use
We’re sector agnostic, so we won’t turn down a loan simply because it’s to a business in a particular industry. We are conscientious lenders, so we want to get under the skin of your business plan to give you the right guidance and support.

If you want to chat through your options, now or in the future, fill out our web form today and one of our lending experts will get in touch.

How much can you borrow with a business loan?

Our business finance starts at £250,000 and goes up to tens of millions. How much you can borrow with us is dependent on a wide number of factors including your earnings before interest, taxes, depreciation and amortisation (EBITDA), your trading history, range of assets, experience, credit history and what you need the loan for.

We can offer a wider range of finance solutions that cater directly to a specific project or industry – for example, a revolving credit facility for the acquisition of a new pub and operational costs needed to make it a success.

What can you use a business loan for?

We offer financing to fast track a business’ growth ambitions, increase profitability, and breakthrough into new markets and areas. 

We’ve provided scaling entrepreneurs with capital to buy land to build new apartments, sustainable housing, specialist education and senior living facilities. We’ve even helped a family-owned business buy out their investors to regain full control.

 We’ve helped experienced pub operators buy new leaseholds to create the new must-go drinks venue. And, we’ve made seemingly complex fund financing a breath of fresh air with umbrella facilities, custom made capital calls, and simple lines of credit. 

So, whether it’s a management buyout, a new acquisition, or a derelict building that needs a new lease of life – wherever your growth plans lie, OakNorth can help you understand the path to get there.

See our business loans

The advantages of debt financing

Business growth relies heavily on financial investment – but business owners won’t always have the cash on hand and won’t want to lose full control over their business by seeking investor funding. 

Often opportunities present themselves at critical moments – management buyouts, mergers and acquisitions, or the sale of new land or property. Growth plans shouldn’t be missed due to a lack of liquidity. But if you’re going to strike while the iron’s hot, you’ll need a lender that’s just as fast, but uncompromisingly diligent. 

Most high street banks aren’t able to keep up with the pace that borrowers need, which means that SMEs have had to explore other alternatives like peer-to-peer lending, venture capital or smaller lenders that prioritise speed. The downside to those options is that you can lose a chunk of your business or receive a smaller loan amount. 

At OakNorth, we’re a fully registered licensed bank with a digital mindset. When it comes to our savings, we’re a trusted institution regulated by the Financial Conduct Authority, and when it comes to business loans, we’re one of the fastest moving in the market. On average it takes us just days or weeks to complete the financing process, compared with months for high street lenders.

 

What are the other advantages of debt finance?

 

No investors or interference: Pay off your loan and interest without losing any of your business.

 

Experts that understand your sector: You’ll be in the right hands with people that want your business to succeed.

 

Finance when you need it: With custom credit lines, you have the freedom to withdraw and pay back as and when you need to.

 

A personalised experience end-to-end: Although we use tech to make the process pain-free, we keep it personal when it comes to lending support.

How to apply for a business loan

Before you consider a long-term loan with us, you should have a well-structured business plan, strong financials, a profitable business, and the right experience and expertise to scale in your sector. 

If an opportunity appears that will add value to your business, help you accelerate your profits, build out your business in new areas, differentiate you from competitors and allow you to thrive in an extremely competitive market, then we want to hear from you.

Not only could we finance the next stage of your journey, but our team of experts can help you navigate the loan process, achieve the best outcomes, and ask all the right questions to turn your aspirations into achievements. 

To get the conversation started, simply fill out our online form and one of our experts will give you a call.

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Case studies

Real estate

Bespoke finance for a new residential development in Brighton

Tuesday March 15th, 2022

The Challenge Founded in 2008, Martin Homes specialises in new build and conversion developments within the prime locations of London, Sussex, Surrey and Kent. With Brighton benefitting from the major city exodus caused by the COVID-19 pandemic, as well as the stamp duty holiday, with buyer demand up 45% in 2020 compared to 2019, the […]

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Real estate

Baxter Homes: Supporting vital SME housebuilders in the North West of England

Tuesday February 22nd, 2022

The Challenge Founded in 2004 by Ian Baxter, Baxter Homes has been building homes for over 15 years, completing projects across the Fylde Coast, Elswick, Great Eccleston and Garstang. With the reduction of finance options for vital SME housebuilders having been amplified by the COVID-19 pandemic as many other banks retrench from the market, Baxter […]

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Frequently asked questions

Yes, we offer a wide range of flexible business loans to a host of different industry sectors, from real estate to hospitality, starting at £250,000.

At the moment, the minimum loan size that we provide businesses is £250,000. 

We work with almost any industry sector, as long as they’re not involved in areas such as gambling, weapons or oil and gas. 

Depending on factors like your business’ risk profile and what you need the funding for, we can provide amortising loans, where you gradually pay off your debt with regular payments, as well as non-amortising loans, where you pay off the loan in a lump sum.

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