How do business loans work?

Business loans work by lending your business money that you need, that is then repaid back to the lender. You borrow a lump sum, agree a repayment schedule, and pay it back over time, usually with interest.

If you're thinking about finance for your business for the first time, or just weighing up your options, it helps to understand exactly how a business loan works before you apply. Here’s what you need to know.

What is a business loan?

A business loan is a lump sum of money lent to a business, to be repaid over an agreed term, usually with interest added. Unlike equity finance, you keep full ownership of your business, the lender just wants their money back, plus a fee for lending it as agreed. 

Business loans can be used for almost anything: funding growth, managing cash flow, buying equipment, hiring staff or covering unexpected costs. It all depends on what your business needs.

Types of business loan

Not all business loans are the same. Here are the main types of business loan you'll probably come across.

Unsecured business loans

An unsecured loan doesn't require you to put up an asset as collateral in order to borrow money. Approval is based on your business's creditworthiness and financial track record instead. 

Secured business loans

A secured loan is backed by an asset, like property or equipment, which the lender can claim if you don’t repay it. Because the risk to the lender is lower, secured loans can sometimes offer larger amounts or lower rates. Understanding the difference between secured and unsecured loans helps narrow down the right product for your needs.

Short-term business loans

Designed for businesses with a more immediate, pressing need for finance, short-term loans usually run for 6 to 12 months. They can come with no upfront fee when applied for directly, with interest only accruing on the amount left to pay.Repayment terms and interest rates vary by lender. 

Asset finance

Rather than lending cash directly, asset finance helps you spread the cost of a specific asset, like a vehicle or machinery, over time. It's a useful route when the funding need is tied to a specific purchase rather than general working capital.

How much can you borrow?

How much you can borrow depends on your business's financial position, including turnover, trading history and creditworthiness. To get an idea of what you might be able to borrow and what repayments could look like, use the business loan calculator before applying, speak to your lender and make sure you read your terms carefully.

How does repayment work?

Most business loans are repaid through fixed monthly installments over the agreed term, which depends on what was agreed at the time the loan was taken out. Each repayment covers a portion of the capital borrowed plus interest, so by the end of the term, the loan is paid off in full.

Many lenders, including Funding Circle, let you overpay or settle your loan early. If you think you'll miss a repayment, it's important to speak to your lender as early as possible. Missing payments can affect your credit score and, in more serious cases, lead to default, where the lender can demand the outstanding balance in full.

What does a business loan cost?

The cost of a business loan comes down to the interest rate, which is shown as a fixed annual rate. Your actual rate depends on factors like your business's credit profile, trading history and the loan term. 

Fees can vary from lender to lender. You may be expected to pay an arrangement or completion fee when you take out a loan, or there may be serving, renewal or early repayment fees, though this won’t be the case for every lender and loan. 

It's always worth comparing the full cost of a loan, not just the headline rate, before deciding.

How to apply for a business loan

Each lender will have a different application process and criteria. Some might need you to have meetings and paper forms, others can be done online. Here’s what you’ll usually need to do in order to apply for a business loan:

• Check if you’re eligible. Each lender will have a set of lending criteria. Your business may need to be a certain age or have a certain turnover. This varies by lender.

• Fill out an application form. This may be online or hard copy. You’ll need to put down details of your business and what you want the loan for.

• Provide supporting documents. Most lenders will ask for documents such as bank statements and accounts to assess your ability to pay back the loan.

• Undergo credit checks & assessment. With the information you’ve provided, the lender will run a credit check on your business. They’ll then decide if you can afford the loan.

• Make you an offer. If they think you can afford it, and you meet any other criteria they have, they’ll make you an offer. This will state the loan amount, interest rate and your monthly repayments.

• Accept and receive funds. If you’re happy with the offer, you can accept it and the lender will transfer the money to your bank account.

Find out more about Small Business Loans and how they can help you to grow your business.

FAQs

How long does it take to get a business loan?

It varies by lender, but many online lenders can give a decision in as little as 1 hour, with funds reaching your account typically within 48 hours of approval.

Do I need a good credit score to get a business loan?

Your credit score is one factor lenders consider, alongside your business's trading history, turnover and overall financial health. A strong credit score can improve your chances and the rate you're offered, but it isn't always the deciding factor.

Can a startup get a business loan?

Yes, though options may be more limited than for an established business. Some lenders specialise in startup lending, while government-backed schemes like the Growth Guarantee Scheme (GGS) can also help newer businesses access finance (subject to eligibility). 

What is the difference between a business loan and a personal loan?

A business loan is taken out in the name of the business and is based on the business's financial position, while a personal loan is based on your individual credit history and is your personal responsibility to repay.

Disclaimer

19/07/2026 – While we want to help as much as we can, the information found here is provided solely for informational purposes and should not be considered financial or legal advice. To the extent permitted by law, Funding Circle does not accept any liability for any loss or damage which may arise directly or indirectly from the use of, or reliance on, the information contained here. All information is correct at time of publishing, and customers should do their own research before making financial decisions. If you have any questions, please speak to your professional adviser or seek independent legal advice.