There are lots of ways to borrow money for your business, and they’re not all interchangeable. Choosing the right type of loan can make a real difference to cost, flexibility and how manageable repayments feel over time.

This guide explains the main types of business loans available to UK small businesses and when each one tends to work best. It’s based on the same core options outlined in the original guide, but reworked for clarity and consistency.

Why the type of loan matters

A loan should fit the job it’s doing. Using the wrong type of finance can mean paying more than you need to or putting pressure on your cashflow later.

Before looking at lenders or rates, it helps to be clear on three things:

What the money is for
How quickly you need it
How comfortably you can repay it.

Once you know that, choosing between loan types becomes much simpler.

Term loans

Term loans are one of the most familiar forms of business borrowing. You take a lump sum upfront and repay it over a fixed period, usually between six months and five years.

They’re often used for larger, planned expenses such as buying equipment, expanding premises or spreading the cost of a major investment. Repayments are usually fixed, which makes budgeting easier.

The trade off is flexibility. You’re committed to regular repayments, and some loans charge fees if you repay early.

Business credit lines

A business credit line works more like an overdraft than a traditional loan. You’re approved for a limit, but you only borrow what you need, when you need it.

This type of finance suits short term cash flow gaps, seasonal dips or uneven income. You pay interest only on the amount you use, and once it’s repaid, the credit is available again.

Rates are often variable, and because the money is easy to access, it’s important to keep a clear idea of what you’re using it for.

Asset finance

Asset finance is tied to something tangible, such as a vehicle, machinery or equipment. The asset itself acts as security for the loan.

You repay the cost in instalments while using the asset, and depending on the agreement, you may own it at the end or trade it in. Approval can be easier than unsecured loans, as the lender has something to fall back on.

The main risk is that if repayments aren’t met, the asset could be taken back.

Invoice finance

Invoice finance lets you unlock money that’s tied up in unpaid invoices. Instead of waiting for customers to pay, a lender advances you most of the invoice value upfront.

Once your customer pays, you receive the remainder minus fees. This can be useful for businesses with long payment terms or clients who pay late.

Costs vary depending on your customers and how the finance is structured. Some arrangements involve the lender contacting your customers directly, which is worth considering.

Government backed loans

Government backed loans are supported by schemes designed to help small businesses access finance. They often come with lower interest rates or longer repayment terms.

These loans are commonly used by startups or businesses investing in growth, innovation or job creation. They can be good value, but applications often involve more checks and take longer to approve.

Availability changes over time, so it’s worth checking what schemes are open when you’re looking to borrow.

Choosing what fits your business

There’s no best loan type in general, only the one that fits your situation.

If you’re funding a specific purchase, asset finance or a term loan may make sense. If you’re smoothing cash flow, a credit line or invoice finance could be a better fit. For longer term growth, government backed loans are sometimes worth exploring.

The right choice should support your business without stretching it.