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Last updated: 14 March 2024

Commercial Loans in the UK

How Does a Commercial Loan Work?

Commercial loans are a form of funding for businesses that seek investments in order to cover their expenses. Loans can be provided by a wide range of institutions through an agreement where the terms and conditions are stated. This agreement will set the further payment of the debt which will differ according to the type of loan requested.

The reasons why organisations request business loans are varied and depend on the situation they are facing. Many businesses require funds in order to carry out market expansions, others need extra funding to cover expenses related materials or equipment. In some cases, this financing form can help startups to launch their products or established companies to overcome an economic downturn.

This funding form offers many opportunities for businesses due to the wide range of financing products that exists in the market, which can span from unsecured business loans to fixed long-term commercial loans. However, in order to find the best possible option, different aspects must be taken into account. Thereby, organisations devote much of their effort towards searching for the most suitable source of capital because the benefits that the right commercial loan can deliver could have a significant impact in the business.

What Are the Different Types of Commercial Loans?

The types of commercial loans is an extensive list, without doubt. There are loans suitable for many business situations that offer several opportunities for companies. This wide range of possibilities varies according to the characteristics and structure of the loan or to the needs of the organisations.

Long-Term and Short-Term Commercial Loans
Type of LoanLong-Term LoanShort-Term Loan
Small Business Loan  
Online Business Loan  
Commercial Mortgages  
Commercial Bridge Loans  
Business Line of Credit  
Installment Loans  
Startup Loans  
Fast Loans  

Long-Term Commercial Loans

There are different situations in which long-term commercial loans are the most suitable funding option. For example, organisations that are pursuing long-term goals with qualified business plans that lack the necessary resources to reach their objectives. Although these are harder to get and the process can be arduous, long-term commercial loans offer flexibility in managing the cash flow of the organisation.

One of the implications of long-term commercial loans is that the overall interest paid will be greater, but the monthly payments will be lower. Moreover, if the loan is one type of secured business loans, the risk for the lender is not as high, thus the interest rates are also typically lower. Although in this case, the company must add collaterals to the agreement in order to benefit from the long-term funding.

Therefore, structured long-term commercial loans may provide the stability an organisation needs to fulfil its plans. Thus, an operation such as a business expansion could benefit from long-term commercial loans, but also it’s a way to finance materials, equipment, or new properties.

How Long Can You Get a Commercial Loan for?

Commercial loans can range anywhere from 3 to 40 years, typically being in the 5 to 15 years bracket for commercial mortgages. Commercial lenders frequently offer shorter mortgage terms but calculate with monthly payments based on a mortgage of 20-25 years, typical for residential loans; then, at the end of the shorter term, another financing deal is made.

Commercial Mortgages

Commercial mortgages are those requested in property acquisitions. This type of commercial loan takes place in different situations and organisations. These can be necessary for new businesses to set up a headquarters or open new factories, for example.

Besides that, commercial mortgage loans also refer to funding activities that are secured by the properties owned by the company. In this case, when the loan cannot be paid, properties act as collateral to cover the debt.

Short-Term Commercial Loans

When a company is about to face temporary challenges that require unaffordable resources, a potential solution could be the acquisition of short-term commercial loans. Organisations looking to invest in short-term projects or encountering difficulties during off-season periods could solve these situations with this type of funding.

These loans have a maximum maturity of two to three years. Thereby, the debt commitment is smaller than in commercial loans on a longer-term period, but the repayment period is shorter. Thus, businesses benefitting from short-term business loans might have a year margin to repay the loan.

Amongst short-term commercial loans are unsecured business loans, which do not require a company to put up any collateral in the agreement. The risk for the lender is higher and therefore interest rates are also typically higher compared to other types of loans. However, unsecured loans are common in situations where the funds are needed quickly, but do not risk the assets of the company.

Commercial Bridge Loans

Commercial bridge loans are one type of short-term commercial loans which are a recommendable option when businesses cannot apply for long-term funding due to several reasons, such as their liability or their credit experience.

This option applies to settings where an investment opportunity is found with short notice. Thereby, a commercial bridge loan serves as a fast financing solution.

Commercial bridge loans have a higher risk than other types due to its implications and characteristics. This will affect the interest rates, although it will be determined by the individual nuances of the organisation and the terms negotiated with the lender.

Business Line of Credit

These loans are generally provided by bank lenders and are a suitable option for emergency situations. This bolsters the cash flow in cases where there is a coming payment and there is a lack of cash on hand in the company. Business line of credit will temporarily solve this situation while the business recovers capital. Even if the characteristics of line of credit slightly differ from loan lendings, these are usually applied as a short-term solutions in business finance issues.

Short Term Commercial Loans

What Are Commercial Loan Rates Now?

There are several factors that affect the interest rates of commercial loans. Depending on whether the commercial loans are fixed or variable, the interest rates that the receivers will have to pay will either fluctuate or stay steady.

The interest rates of commercial loans is established depending on different factors. On the one hand, the individual factors such as profit, turnover or credit will be analysed by the lenders to determine the risk and the interest rates in most cases. On other hand, economic indicators, such as the Annual Percentage Rate (APR), the London Interbank Offered Rate (LIBOR) or the interest rates of government bonds will have a great influence on the interest rates of commercial loans.

The rates of government bonds directly affect the interest rates as lenders use this indicator to compare and set up their prices. These types of bonds are one of the safest, as the government is backing up the product. Thereby, lenders calculate the risk of the market in relation to this interest rates of commercial loans.

Long- and Short-Term Interest Rates UK
YearLong-Term Interest Rate UKShort-Term Interest Rate UK
20181.46% (forecast)0.72% (forecast)
20191.32% (forecast)0.92% (forecast)
20201.48% (forecast)1.19% (forecast)

Source: OECD

What Is a Good Commercial Loan Interest Rate?

The interest rate depends on many factors, influenced by both economic and political situation as well as the borrower's situation (credit score, collateral, down payments). To achieve a favourable rate, you might wait until there is an economic growth dip when banks are more willing to loan out, or if it is more urgent, you can try haggling by getting offers from several banks.

How Much Do You Have to Put Down on a Commercial Loan? 

It is different for each type of business loan. As it might be crucial for you to know the down payment when applying, we have gathered all the factors that can affect the percentage. Keep in mind that some of the lenders don't require a down payment. Thus, in evaluating thow much payment will be required, these are the considered characteristics:

    • Business Loan Type
    • Amount
    • Loan Purpose 
    • Borrower's financial profile (can be both business or personal financial history)

Fixed Commercial Loans

In the case of fixed loans, the interest will not change throughout the period of the loan. Therefore, the recipient of the loan is able to calculate and plan interest payment accordingly. The interest rate will vary depending on the economic situation of the country. Generally, fixed term commercial loans are steady but variable interest loans could have lower interest rate than the fixed.

Variable Commercial Loans

Contrary to the the fixed loans, variable loans have an interest rate that constantly fluctuates over time according to the market interest rates. How the interest rate is calculated depends on several elements. For example, the uncertainty will be higher and also less predictable, although the interest rate might be lower than in fixed loans. In some cases, lenders establish a range of variables and the interest may only fluctuate within this range.

Variable Commercial Loans

Who Can Get Commercial Loans?

Startups and individual entrepreneurs, small and medium enterprises (SMEs), and large companies are eligible to apply for commercial loans. In the UK there were 5.7 million businesses registered in 2017 and 99% were SMEs. The financial activity is essential for all type of business to thrive and maintain a healthy cash flow.

Commercial Loans for Small and Medium Enterprises (SMEs)

The opportunities of funding for small businesses are becoming much more relevant in the recent years. Since SMEs are one of the most common receivers of commercial loans, the market offers a great deal of options. Despite traditional financial institutions having been some of the most reluctant towards financing these types of companies companies, the changes in the economic landscape and the outstanding number of SMEs has reshaped the situation. Now money lenders have enhance the diversity of the commercial loans they offer, including bad credit lenders, in order to keep up with competitors. The needs that SMEs usually face are related to growth issues, such as market expansions or even equipment and staff expansion.

Commercial Loans for Startups and Entrepreneurs

Launching any business requires funding. Together with SMEs, startups are the most common beneficiaries of commercial loans. Thereby, there are many offers in the market with different conditions. Business startups loans range from Government based funding in the UK to traditional bank operations framed in programmes to bolster entrepreneurship. In that regard, business loans for women are a common options for female entrepreneurs.

Commercial Loans for Large Enterprises

Large organisations are continuously in demand of commercial loans and funds to attain different projects. Long-term commercial loans are one of the most common options due to the dimensions of the loans and the high qualifications based on their business experience with finance products. The difficulties to acquire a suitable loan are less than those for SMEs and startups who are often considered riskier investments.

Interest Rates of Commercial Loans

Who Are the Most Common Lenders?

Before taking out a commercial loan, it is important to consider what lending source to use. There are many different types of lenders to choose from. Some common commercial loan lenders are:

    • The government
    • Institutions
    • Banks
    • Online lenders
    • Individual investors

The UK Government offers several programmes with special focus on SMEs and startups. Moreover, institutions usually target specific groups that offer commercial loans for young entrepreneurs or women.

Banks are the traditional source of funding. These have a wide offer of different products with great variety of terms, conditions, and opportunities. Banks are the lenders that lend most of long-term commercial loans. Even though, due to the increase of short-term commercial loans, banks are offering attractive options for SMEs and entrepreneurs.

Besides, individual investors also act as lenders in financial operations of different forms. Peer-to-peer commercial loans are executed directly between investors and companies. These relations are common with SMEs and startups due to the high revenue and growth potential they might have and the lack of confidence they could receive from other lenders.

In the recent years, online lenders have become the new form of financing for many different reasons. If a bank does not approve a loan due to their stringent terms and processes or the interest rates presented are high, then businesses typically seek online funding instead. As in the traditional way of funding, online business loans also offer many different products to fit the needs of businesses.

How Can I Get a Commercial Loan?

Getting a commercial loan can be time-consuming and confusing process and you might often catch yourself asking what is needed for a commercial loan. To make it easier for you, we have proposed step-by-step guide on what to consider and do before applying. 

    1. Decide why you need a commercial loan. Before anything else, you need to decide why you need a commercial loan. This will help you choose the right type (there are many). 
    2. Familiarize yourself with the different loan types and lenders. Each loan type is different, with different requirements and conditions. So, do your research and find what is the best fit with your needs, before proceeding with the next step.  
    3. Choose the commercial loans you qualify for. After you have checked all the loans, pick those that you qualify for, and can potentially get. This will of course depend on the details of your business and many other specifications. 
    4. Prepare your application. Last step is to prepare your applications and apply. This can involve filling out different application forms, as well as preparing all the required documents. 

Find the Best Commercial Loans for Your Business

The commercial loans market offers a wide range of opportunities for all kind of companies to fulfil their economic needs and ambitions. The individual situation will determine which is the best funding option for your business. In some cases, short-term commercial loans will be a suitable financial solution, whereas in other scenarios long-term commercial loans with fixed interest rates will be the best. Thereby, in the attempt to make the right decision it is important to acknowledge the nuances of your business and navigate through different offers.

 All content in this website is for informational purposes only and it does not constitute financial advice and/or recommendations and it should not be relied upon as such. 

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