Businesses need access to limited company loans at different stages of their development cycle. For some businesses, it’s cash to invest in new plant, equipment, and machinery to keep up with their competitors. For others, they’re hiring new members of staff as they increase their number of branches to widen their geographical reach. Occasionally, a company loan might be needed to cover an unexpected or higher-than-expected tax or supplier bill.
There are more financial services companies offering limited company loans and variations on traditional limited companies loans than ever before. But what do you need to know about limited company loans before applying for one?
In this article, we consider:
- how limited company loans work
- whether you should apply personally for your loan or through your limited company
- how much can your company borrow over how long and will be it expensive
- whether you have to put up your home as security
- some of the most frequently asked questions about limited company loans, and
- what you do to do to find a loan for your limited company
If you want help finding the right type of limited company loan for your business, please leave us your details in the form at the top of the page. We’ll match your company to the lenders on our panel most likely to be able to offer you the best interest rates on the most flexible terms. There’s no charge to using our service and you don’t have to accept any offer made to you by the lenders we work with.
How do limited company loans work?
Your limited company is a separate legal entity from you. It has its own bank account and its money is stored in that bank account. Your limited company can lease premises, open trading accounts with suppliers, take payment from customers, and more.
You may be the shareholder and/or the director of your limited company but, in law, you are not your limited company and your limited company is not you.
When your limited company is accepted for a loan, it’s the responsibility of your limited company, albeit under your management, to repay the loan.
If your business plan does not work out as you hoped and your limited company is liquidated, whatever balance remains on the loan will remain unpaid subject to whatever an insolvency practitioner can raise from your company’s creditors.
One of the attractions of owning a limited company as opposed to being a sole trader or a partnership is that your personal liability for your company’s debt is limited to the value of the shares you hold in it.
You will not be personally responsible for settling the balance of the loan because it was not your name on the loan documentation – it was your company’s name. This is true, in theory, if you have not signed a personal or director’s guarantee – we’ll cover that later.
Should I apply personally or should my company apply?
It is possible to take out a loan personally and then invest some or all of that money into your business.
This would not be an advisable idea of a number of reasons, the main ones of which are:
- Interest reclaims – your business can reduce the level of profit on which it pays tax by the amount of interest on a loan it takes out directly.
- Your credit score – ideally, the credit files held on you and your company should be completely separate. If your business fails to pay a loan back, it won’t appear on your personal credit file.
However, if you take out a loan personally which you can’t repay because your business fails, it will appear on your credit file and severely affect your chances of being approved for other types of finance for years to come.
- Access to funding – generally, especially for established companies, banks and other financial institutions are willing to lend larger sums of money direct to a limited company with a track record of profitability than they are via their director.
- Fraud prevention – many companies lending to individuals specifically state that they forbid the money they advance to a borrower to be used for business or speculative purposes.
How much can a limited company borrow?
Individual lenders have their own minimum and maximum amounts that they feel comfortable lending to limited companies.
The smallest loans start from £1,000 with some lenders offering up to £5,000,000. The larger the loan, the more likely you are to be asked to pledge security for the funding.
How long does my company have to pay the money back?
The shortest repayment period is one month with the most common maximum repayment period being five years. Loans with longer terms than five years tend to be secured loans.
Are interest rates expensive on company loans?
As a general rule of thumb, the interest rate you pay is likely to be lower:
- the more the number of years you trade,
- the more stable your ongoing level of profitability,
- the better credit history you and your company has, and
- the more money your company borrows
Are company loans secured on my property?
Some limited companies are offered with security taken out on either property a business owns or the residential property owned by one or more of the shareholders.
There are plenty of lenders on the market that limited company owners can apply to who do not require security. If you do pledge security, however, your loan request is more likely to be accepted and you’re more likely to be offered a lower rate of interest.
How long does it take to get an answer to my application for a company loan?
It depends on the finance provider but some can get back to you with a firm offer within 30 minutes. You should expect it to take 2-3 days to receive a firm offer from most lenders though and you may be asked to present documentation including business plans and financial forecasts to support your application.
Company loans FAQ
What is a personal guarantee?
A personal guarantee is a commitment made by you to repay the remaining balance of any loan on a “trigger” event – for example, if you call in administrators, enter into a company voluntary arrangement, or breach banking covenants.
When drafting personal guarantee legal agreements, lenders and their solicitors try to build in as many trigger events as possible so that they’re able to, in nearly all cases, turn their attention to you personally to collect their money. Many lenders try to secure personal agreements from all directors no matter how commercially successful they are now or have been in the past – being asked to sign one is not a reflection of the lender’s opinion on your ability to run a business well and within budget.
Agreeing to a personal guarantee negates one of the key advantages of lending money for your business as a limited company – that advantage is that your liability can never be higher than the value of the shares you own.
You should try to avoid personal guarantees at all costs. If this is not possible, you may wish to try to negotiate the scope of the personal guarantee with the lender although you will be likely to need a solicitor to help you with these discussions.
How is a merchant cash advance different from a company loan?
A merchant cash advance is a loan based upon your average daily takings on sales paid for by credit or debit card. In most cases, up to 2-3 months’ turnover can be advanced.
Instead of paying back the loan once a month, a certain percentage of your daily settlement (the one big payment you receive a day from your merchant services provider) is deducted at source and that deduction is classed as a repayment. The size of the deduction is negotiable but you can expect initially to be asked to pay up to 10% of your daily settlement until the loan and its factor is cleared.
What is a factor? A factor is term used to describe the interest payable on a merchant cash advance – factors are expressed as a number like 1.2 or 1.3. A factor of 1.2 means that the cost of your loan is 20% of the advance, 1.3 30% and so on.
Most merchant cash advances are repaid over a period of up to 10 months and no personal guarantee is required to take one out.
Can I repay my business loan early?
Yes, in most cases. Most business finance providers allow you to pay off your loan ahead of the schedule you’ve agreed to. The major benefit of doing so is that you will save money on interest.
Some lenders may require you to pay an early settlement fee to compensate you for the interest they will no longer be collecting as a result of your repayment of the balance in full. With some lenders, this may be a penalty of up to three months’ interest payments or more.
Please check the terms and conditions of the loan prior to signing to understand a lender’s policy and to determine whether you’re happy for your company to be bound by these terms.
Can I top up my business loan?
Whether you’re permitted to open another loan account or to top up your existing loan account with the same lender depends on that lender’s policy. If they do permit it, their acceptance of your request to top up your loan will generally depend on your conduct of the account to date – in particular that you have met all repayments on time and in full.
What happens if my company misses one of more payments?
You should not seek funding for your business if you are not entirely sure how you will make each and every repayment in time and in full prior to agreeing to take out a loan especially if you are required to offer a personal guarantee as a prerequisite of acceptance.
If you believe that your company will struggle to make the (next few) repayments, you should contact your lender as soon as possible with a view to arranging an alternative repayment plan. Some lenders will be more amenable than others to a proposition to do this but, either way, it’s always better to let them know rather than let a direct debit bounce and then ignore chasing calls from the lender’s customer service team.
Can I borrow money to pay off a tax bill?
Yes – you can use the money you borrow to pay off a corporation tax bill, VAT bill, or any other liability to HMRC.
Can new start and young limited companies take out loans?
Yes although your choice of lenders is likely to be much more limited.
The following lenders offer loans to companies with 6 or 12 month trading histories.
Compared with the interest rates you’d pay on loans for longer-established limited companies, this is an expensive form of credit.
However, it is worth bearing in mind that, as little as 10 years ago, no company would lend money without security to a company without two (or even three) years’ accounts.
| Company | Minimum loan | Maximum loan | Interest rate | Interest rate max | Interest applied | Minimum term | Maximum term |
| Fleximize | £5,000 | £500,000 | 42.20% yearly representative | 1 | 48 | ||
| Iwoca | £1,000 | £200,000 | 49.00% yearly representative | 1 | 12 | ||
| Capify | £3,500 | £150,000 | 67.89% yearly representative | 6 | 10 |
Each of the options above requires you to agree to taking out a personal guarantee leaving you personally liable to repay the remaining balance on a loan should your business fail.
For companies yet to start trading and for those under two years of age, each director may borrow up to £25,000 (subject to a maximum of four directors) to fund a new start-up or a very early stage business. The money is provided by the Start Up Loans Company, a trading division of the British Business Bank.
They distribute the money to start-ups and early-stage companies via a network of local delivery partners.
From initial application to the transfer of funds to your limited company bank account can take up to four months – ideally, you should start planning to apply for a loan as soon as possible making sure as possible that you’re precise with the date of your launch to coincide with the arrival of the loan money.
In addition to the Start Up Loan company’s application form, you’ll be expected to submit a lot of documentation about your business. In addition to the business plan and your financial forecasts, you need to present information on what you’re going to sell and who you’re selling it to, an analysis of your competitors, who is going to supply you, management and staffing details, likely premises location, invoicing and payment methods, and more.
Unlike with a standard limited company loan, it’s your name on the loan documentation and not your limited company’s. The organisation make personal loans for business purposes. If your limited company fails, the Start Up Loan Company will still expect to receive their repayments once a month. Your remaining loan balance will not die with your limited company.
How are repayments collected?
Standard limited company loan repayments are usually collected once a month from your nominated bank account by direct debit.
Finding the right limited company loan for your business
There are hundreds of companies in the UK, including traditional High Street Banks, making loans to limited companies – competition is intense and, for most businesses applying for credit, this competition will benefit them through lower interest rates.
There has also been a lot of innovation in the different types of financial products offered to businesses in recent years including more flexible invoice discounting, revolving credit facilities, merchant cash advances, and more.
To get the best deal for your business on the most suitable financial product and on the most favourable terms, please fill in the form at the top of the page. We’ll find out everything we can about you and what you need the money for – we’ll then present you to the lenders on our panel most likely to want to help you with an aim of delivering 3-4 quotes for you to consider.
Our service is free and there’s no obligation to accept any of the deals we find for you (subject to status).