A guide to small business loans

Owner of coffee shop smiling at camera

Starting and growing a business can require a lot of investment, and it’s not always possible to fund this yourself. Small business loans are a common source of funding to help businesses get off the ground, manage cash flow, or expand.

What is a small business loan?

As the name suggests, a small business loan is a loan that is provided to small businesses to help them with start-up or operational costs or to enable growth. The term is also often used more specifically to refer to loans of a smaller amount – also known as ‘micro loans’. Small business loans are available from a variety of lenders, from high-street banks to online and specialist lenders.

We support small businesses with micro loans from £1,000 to £50,000, with flexible repayments and no early repayment fees – visit our micro loans page to learn more.

Can I use a small business loan to fund a startup?

Yes - while some lenders only provide finance to established businesses, there are others (including us) that will lend to startups to fund their launch or support them through the early years of trading. If you don’t want to take on debt, another route is equity finance – you can learn about the differences between debt (loans) and equity in our article.  

What are the different types of small business loans available?

There are many types of small business loans available, so it’s important to do some research to help you determine which is best for your specific needs and situation. Some popular types of loan include:

Term loans

A term loan is where you receive a lump sum of money, which you then repay with interest over a set period of time, usually between one and ten years. Term loans can be secured, meaning that you pledge an asset such as property or equipment as collateral, or unsecured.

Asset finance

When you need equipment such as plant machinery, vehicles, or just standard office equipment, but your cash flow requires you to spread the cost, asset finance can be a good option. There are two main types of asset finance: equipment leasing and hire purchase. Equipment leasing is where the finance provider purchases the equipment then rents it to you over a set period of time. Hire purchase works in a similar way, but it gives you the option of purchasing and gaining ownership of the asset once you’ve paid the final instalment.

To find out more about the different types of asset finance and how they work, read our guide to asset finance.

Invoice finance

Invoice finance can help improve your company’s cash flow by unlocking the money tied up in unpaid invoices. Instead of waiting for the customer to pay you, you receive a significant portion of the invoice amount immediately. Upon receipt of the customer’s payment, the remainder is paid back to you, minus a percentage of the invoice amount that goes to the lender.

How much money can I borrow for my business?

The amount of money you can borrow depends on a variety of factors, such as the lender, your company’s financials such as turnover and profit, credit score, and the type of loan.

If you want to get an indication of how much the loan will cost, some lenders have an online small business loan calculator. Make sure to work out exactly how much you can afford to pay each month and check all features, including interest rates, APR, and fees when you’re comparing loans.

What are the requirements to qualify for a small business loan?

The requirements for qualifying for a small business loan will vary depending on the lender and the type and size of loan you’re applying for. Which each lender has their own criteria, some factors that they commonly take into consideration include:

- Age and industry of your business

- Credit score and repayment history

- Revenue and cash flow

- Assets

- Personal investment

- Personal experience and qualifications

What documentation do I need to apply for a small business loan?

The documentation you’ll need to provide will again vary by lender. If you want to apply for a small business loan of up to £50,000 from us, we’ll need to see:

- Business plan summary

- Historic accounts (up to two years if available)

- Two years cashflow forecast for loans over £25,000 (One year for loans up to £25,000)

- Up-to-date management information

- Previous three months bank statements (personal if start-up)

- Statement of assets, liabilities, income and expenditure

If you're looking for finance to launch your business then a personal cash contribution is usually required.

If you’ve been trading for over two years, you may be eligible to apply for a fast track loan up to £50,000 where less financial information is required.

How can I increase my chances of getting approved for a small business loan?

Being prepared and organised can help the loan application process go more smoothly and increase your chances of getting a small business loan. These are a few things you can do to prepare:

- Develop a solid business plan

- Have a detailed understanding of how you will use the funds

- Prepare the financial information required for the application

- Research and choose the right lender and review the eligibility criteria. Determine if they a good fit for your business and needs

For more guidance on steps you can take to build a strong application, read our blog post 5 tips for applying for a business loan.

Does the Development Bank of Wales do cash flow loans for small business?

Yes, our small business loans can be used to help boost cash flow. Find out more on our micro loans page.

What are the best small business loans?

When you’re looking for a small business loan, make sure you choose a reputable company and look at things like interest rates, repayment terms, and flexibility. How easy is it to speak to someone?
If you’re looking for an experienced lender who can support your ambitions, speak to our dedicated micro loans team to see how we could help you and your business.

What are the interest rates and fees associated with a small business loan?

We consider each loan application we receive on an individual basis. Whatever rate you get, it’s fixed for the life of your loan with us.

As we work with the Welsh Government, we’re able to reduce the interest rate on our loans by up to 2% for businesses either based in a Welsh Enterprise Zone or those planning to relocate to one.

Find out more on our interest rates page.