Self-Employed Loans For Small Business

A self-employed business loan is a business loan which business owners, from sole traders to small and medium-sized limited company owners, may be able to get.

A business loan is a cash loan that provides a way for small business owners to access finance to cover their operational costs and expand their business. Small business loans are typically for a fixed term, during which time you repay both the capital and the interest.

The interest rate is often fixed (i.e. remains the same even if the base rate changes) but can be variable. Small business loans can be unsecured or secured against an asset, such as your house, or by a personal guarantee.

If you’re self-employed and run your own company, a business loan could provide a cash injection to support start-up costs, weather difficult times, scale up, or launch new products and services.

The loan options above are geared towards sole traders, start-ups and small businesses in particular.

Small business loans typically start at around £500, and may extend up to £50,000. However, at the highest end of this range your business may need to meet minimum turnover requirements.

These loans usually have a repayment period between one and five years, but you may also find short-term funding solutions with repayment periods between three and 12 months, or longer term loans of up to 10 years.

The first step is to research and compare the available options and decide on the most suitable business loan, considering rates, fees and eligibility criteria.

Small business loans are available from a range of mainstream lenders, including high street banks and building societies. Bear in mind that many of these lenders require you to have at least two years’ trading history before you’ll be accepted for a loan.

Alternatively, you could consider online-only lenders, specialist brokers or a government scheme. These solutions may offer more flexibility.

The next step is to gather the information needed in the application process which is set out below in the FAQ “What information will a lender require?”. This will include financial statements and information about the business and individuals.

At this point, the application can be started, either online or in person. The time between the initial application and receiving the funds varies by lender but can take from a day or two to several weeks.

The interest rate you’ll be charged on a small business loan depends on your individual circumstances. If you launched the company recently, interest rates tend to be higher, due to the higher risk profile of start-ups.

Other facts that can influence the interest rate you’re offered include your company’s trading history, cash flow forecasts, borrowing term, whether it’s secured or unsecured and your own, personal, credit history.

Lenders may also charge fees on their loans:

• initial fee: Some providers charge an initial fee to cover the administrative costs of setting up a loan. This could also be called an arrangement, documentation or ‘draw-down’ fee. It may be up to 5% of the loan value, and is typically spread between your monthly repayments
• early repayment fee: You may be charged an early repayment, or ‘early redemption’ fee if you want to repay the loan before the end of its agreed term. Some lenders charge the remaining interest you would have paid if the loan hadn’t been redeemed early, instead of a separate fee.

Taking out a business loan could be a good option if you’re self-employed. But it’s not a one-size-fits all approach to funding. Below are some of the key pros and cons.

Pros

• the ability to borrow larger amounts of money could help your business grow
• business loans may charge lower interest rates than other forms of borrowing, such as credit cards
• loans with a fixed interest rate and consistent monthly repayments offer predictability
• you could borrow for the long-term, with some lenders offering terms of up to 25 years
• you can access funding without the need to bring in new investors and dilate owners’ shareholdings.

Cons

• lenders may require a personal guarantee, or ask you to secure the loan against personal assets such as property
• loans are not as flexible as other forms of borrowing, such as an overdraft or credit card, since the amount you can borrow is set at the beginning of the loan term
• a lender’s minimum loan amount may be higher than you need
• interest rates may be variable, which means your monthly repayments could move up and down during the course of the loan
• you and your business will need to meet eligibility criteria – and interest rates could be higher if you or your business does not have a good credit score
• there may be penalties for paying the loan back early.

Each lender will have a slightly different application process, but you’ll typically need to provide the following:

• business plan: a business plan is essentially an outline of your company’s objectives, and how you plan to meet them. It will typically include market research, a sales and marketing plan, potential issues and how they could be resolved. The British Business Bank has put together a detailed guide to writing a business plan

• cashflow forecast: these forecasts outline the money coming and going from your business. It typically covers income – such as revenue, other loans and investments – and outgoings – such as supplier costs, sales and marketing costs, VAT and tax, wages, rent, council tax and any credit repayments. It should also include your net cash flow – the difference between income and expenses

• your plans for the loan: lenders will ask you to summarise what you plan to use the loan for, to show them how it will help you expand your business. Along with these documents, you’ll be asked to provide personal details for all individuals named on the application. This includes your contact details, details of any existing loans, and bank statements. Before you apply, carefully check the lender’s eligibility criteria, and ensure you have everything you’ll need to hand.

Taking out a business loan isn’t your only option when it comes to borrowing money as a self-employed worker.

Below are a few alternatives to consider:

• business overdrafts: Some business bank accounts offer an overdraft facility, which could be a useful option for borrowing small amounts of money for a short period of time. Whether you’re offered a business overdraft, and the interest rate you’ll pay, depends on your individual circumstances

• business credit cards: With a business credit card, you can borrow small amounts of money, up to a certain limit, on a flexible basis. Since these cards are aimed squarely at businesses, they may also offer perks such as cashback on business spending, and free supplementary cards for employees. However, credit cards typically charge a higher rate of interest than loans if the balance is not repaid in full each month

• invoice finance: With invoice financing, unpaid invoices can act as security against a loan. You can typically borrow up to 90% of the value of your unpaid invoices. This type of credit is offered by a range of providers, including both business specialists and mainstream banks and building societies

• government grants: The UK government may offer grants to businesses in certain sectors or regions. If your business is offered a grant, this does not need to be repaid

• crowdfunding: Some businesses secure funding by pitching their idea to a ‘crowd’ of small investors – often the general public – who invest money and become shareholders. Notable companies that used crowdfunding include the Scottish brewer and pub operator, BrewDog and online bank, Monzo

• government loans: Back in 2012, the government launched its own Start Up Loans scheme to provide new businesses with a source of funding. To date, the scheme has lent more than £941 million to 100,000 UK businesses. Under the scheme, business owners who have traded for less than three years can apply for unsecured loans, with a fixed interest rate of 6% per annum. Repayment terms range from 12 months to five years. The scheme provides personal, rather than business loans, which means they are offered to individuals rather than the companies they run. Each individual can apply for Start Up Loan of up to £25,000, and each business can borrow up to £100,000 overall. However, the average loan size for this scheme is £7,200. As well as the loan itself, successful applicants receive support for creating a business plan and cash flow forecast, along with a year of business mentoring.

To arrive at our Forbes Advisor star ratings, we considered the following criteria for each business loan provider, and overlaid these considerations with editorial judgement:

• minimum turnover: the minimum turnover, or sales, required to apply for the loan
• loan size: the minimum to maximum amount that could be borrowed. Those loan providers with greatest flexibility scored highest
• length of loan: the length of repayment periods available
• other factors: we also considered differentiating factors such as interest rates, fees, early repayment charges, security required and length of trading history needed to be eligible.