Loans and overdrafts

Where to look for a loan

Banks and building societies are the main source of small business loans, but many other companies provide loans at competitive rates.

Specialist lenders

Specialist loans that comply with Islamic sharia law are available for Muslim business owners. In sharia law, the giving or receiving of interest is prohibited and money must be invested ethically. The Islamic Bank of Britain is one of a number of banks that provides sharia-compliant lending. Find out about modes of Islamic finance on the Islamic Bank of Britain website - Opens in a new window.

Other specialist lenders include Prime, for people over 50 setting up businesses, the Prince's Trust, for young people setting up in business, and the Industrial Common Ownership Finance Fund, aimed at co-operatives, employee-owned business and social enterprises.

Your business may also be eligible for support from a Community Development Finance Institution (CDFI). These provide loans and investment to individuals and organisations whose purpose is to create wealth in disadvantaged communities or under-served markets. Find out about CDFIs on the Community Development Finance Association (CDFA) website - Opens in a new window.

Getting the best loan deal

There are several steps you can take to get the best deal:

• Take time to shop around and compare interest rates carefully, as they can vary significantly. Negotiate with the bank to get the best deal and ask for any special terms in writing. Check the Business Account finder service on the British Bankers' Association (BBA) website - Opens in a new window.
• Use a finance broker to propose the best deals for the type of finance your business needs. A broker can save you time and increase your chances of getting a loan by presenting your proposal in the best way to the most appropriate lenders. Find a financial broker on the National Association of Commercial Financial Brokers (NACFB) website - Opens in a new window.
• Research the small print. Apart from interest rates, assess other lending criteria, such as loan terms and set-up fees. Investigate any special deals there may be for start-ups. Consider having an expert, such as a solicitor, review the loan documents.
• Be well informed about your own finances. Find out about the factors that affect your credit rating and have a clear picture of your business finances. This will help you avoid expensive loans and make sure you get a deal that meets your needs. Find out about credit scoring on the BBA website - Opens in a new window.

Be prepared to switch providers. You don't have to stay with the bank that manages your personal account to be considered for a loan. It's wise to compare loans from at least four providers. Use our interactive tool to assess your eligibility for government guaranteed lending schemes.

Small Loans for Business offers loans of up to £50,000 to small- to medium-sized businesses that have viable business plans but have been refused bank finance. It is part of a wide range of support offered to businesses in England through the government's Solutions for Business portfolio of business support.

Finance for Business offers flexible finance solutions such as loans for businesses with viable business plans that are unable to get support from commercial banks and investors. This scheme also offers other types of finance including equity finance and is part of the Solutions for Business portfolio.

To find out if Small Loans for Business and Finance for Business are available in your area contact the Business Link Helpline on Tel 0845 600 9 006.

Solutions for Business is only available in England. Government support for businesses is different in Scotland, Wales and Northern Ireland.

Warning - avoid unauthorised lenders, otherwise known as loan sharks. You may get a loan fast, possibly without needing a business plan or security, but there are strings attached. You can check that the lender is licensed by the Office of Fair Trading (OFT) on the OFT website - Opens in a new window.

You may be dealing with a loan shark if:

• the salesperson is pestering you or is particularly pushy
• the interest rate is significantly higher than other lenders
• the company is reluctant to show you the loan terms and conditions
• you are asked to tie yourself into a longer-term contract than you require

You may also find yourself a target for loan sharks if you have a poor credit record and would normally find it difficult to raise finance.

Standards of conduct for lenders

The Lending Standards Board has replaced the Banking Code Standards Board. The British Bankers' Association, Building Societies Association and UK Cards Association Lending Code aims to ensure that business standards are maintained when providing overdrafts, unsecured loans and credit cards to personal and small business customers. Under the code, you can access information on how credit assessment must be carried out and how to manage cases of financial difficulty.

The code also makes new requirements on risk-based repricing, a period of grace for credit card customers in financial difficulties, and good practice for dealing with customers with a mental health condition who are in financial difficulties.

If you are refused finance - Business Link financial intermediary service

There is no guarantee that your application for finance will be successful. If you have had difficulty accessing bank finance, Business Link offers a financial intermediary service.

The service helps businesses review possible reasons why funding was not granted, especially if lender feedback has been limited or where the decision appears arbitrary or inconsistent.

If you are eligible for this service, Business Link advisers can help you to build a stronger relationship with your business' bank, guide you on what to do when seeking finance and offer support with other access to finance issues. Find your local Business Link through our Contacts Directory.

Subjects covered in this guide

Introduction
• Loans
• Where to look for a loan
• Obtaining a loan and offering security
• Overdrafts
• Loans from friends and family
• Providing a guarantee for your loan
• Enterprise Finance Guarantee
• European Investment Bank funding for small and medium-sized businesses
• Here's how my business benefited from taking out a loan (Flash video)
• Here's how securing the right loan helped my business develop

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