Business Loan Types Explained: Which Is Right for Your UK Business?

In this article

• Term loans are the most common type: fixed sum, fixed term, fixed repayments
• Revolving credit facilities give flexible access to an agreed limit, interest on what you use only
• Invoice finance unlocks cash from unpaid invoices, typically within 24 hours
• Asset finance spreads the cost of equipment or vehicles over the asset's working life
• Merchant cash advances are repaid as a percentage of daily card sales, with no fixed payment

Term loans: fixed sum, fixed repayment

A term loan is the most straightforward business finance product. You borrow a fixed sum, agree a repayment term (typically 3 to 60 months), and make equal monthly instalments covering capital and interest. The interest rate can be fixed for the full term or variable (tracking a base rate). Fixed rates are generally preferable for businesses that need certainty over their monthly cost base.

Unsecured term loans require no collateral but typically carry higher rates than secured alternatives. They suit businesses funding working capital, covering a short-term cash flow gap, or making a one-off investment that will be repaid from profits within two to five years. Typical amounts range from £10,000 to £500,000.

Secured term loans use property, plant or other assets as security. This allows lenders to offer larger amounts (often into the millions), longer terms (up to 25 years for property-backed facilities), and lower rates. Secured loans are slower to arrange because of the legal charge process but are significantly cheaper for larger transactions.

Revolving credit facilities: flexible access to capital

A revolving credit facility (RCF) works like a business overdraft. You are approved for a credit limit, and you can draw down up to that limit, repay, and draw again as needed. Interest is charged only on what you have drawn, not on the full limit. This makes RCFs highly efficient for businesses with variable cash flow: you only pay for what you use.

RCFs are particularly useful for businesses with seasonal revenue, frequent large outgoings, or a mismatch between when they invoice and when they get paid. Rather than taking a lump-sum term loan and paying interest on the full amount from day one, a revolving facility sits ready and costs nothing until you draw on it.

Most RCFs are reviewed annually. The lender assesses whether your business circumstances have changed and adjusts the limit accordingly. Some facilities include minimum usage requirements. Rates on RCFs are typically slightly higher than equivalent term loans, reflecting the flexibility they provide.

Invoice finance: unlocking cash from your debtor book

Invoice finance allows UK businesses to access up to 90% of the value of an unpaid invoice within 24 hours of raising it, rather than waiting 30, 60, or 90 days for the customer to pay. When the customer pays, the finance company releases the remaining balance minus fees. It effectively converts your debtor book into immediate working capital.

There are two main types. Invoice factoring is where the finance company manages your sales ledger and collects debts on your behalf. Your customers know you are using the facility. Invoice discounting is a confidential arrangement where you manage your own collections and the facility is invisible to your customers. Discounting typically requires a higher turnover and a more established credit control process.

Invoice finance is suited to B2B businesses with good-quality commercial or public-sector customers. It does not work for consumer-facing businesses or those with very short payment terms. The cost depends on the service charge (a percentage of the ledger) and the discount charge (interest on funds drawn). A broker can compare facilities across 20+ invoice finance providers.

Asset finance: spreading the cost of equipment

Asset finance covers three main structures. Hire purchase: you pay monthly instalments and own the asset at the end. Finance lease: the lender owns the asset throughout; you make rental payments and have options at the end of the term (extend, purchase at market value, or return). Operating lease: shorter-term, off-balance-sheet, with lower payments because the lender retains residual value risk.

The key advantage of asset finance over a term loan for equipment purchases is that the loan is secured against the asset itself, which typically produces better rates and higher approval rates. Lenders are primarily concerned with the asset's value and your ability to service the payments, which makes asset finance accessible even for businesses with limited trading history.

Hire purchase payments qualify for capital allowances under HMRC rules, including the Annual Investment Allowance. Finance lease rentals are normally fully deductible as a business expense. The right structure depends on your tax position and whether you want to own the asset at the end of the term.

Merchant cash advances: repaid from card sales

A merchant cash advance (MCA) is not technically a loan. A lender advances you a lump sum, and you repay it by surrendering a fixed percentage of your daily card takings until the full advance plus a factor fee is repaid. Because repayments fluctuate with your revenue, there is no fixed monthly payment to meet, which suits businesses with highly variable income.

MCAs are commonly used by hospitality, retail, and leisure businesses. The key disadvantage is cost: factor rates of 1.2 to 1.5 (meaning you repay 20% to 50% more than you borrowed) make MCAs substantially more expensive than term loans. They should be treated as a last resort or as short-term bridging where a conventional loan is unavailable.

The FCA does not currently regulate MCAs in the same way as consumer credit, so terms can vary significantly between providers. Always confirm the total repayable amount, not just the factor rate, and compare it against the equivalent APR to understand the true cost relative to other products.