All funding products

Term loans.

A term loan is the simplest piece of business borrowing there is: a fixed amount, repaid over a fixed period, on a known schedule. Most UK SME term loans run from one to seven years, with interest priced as a margin over the Bank of England base rate or SONIA. The product hasn't changed in decades. The lenders, pricing, and eligibility have.

The basics

What is a term loan?

You borrow a defined sum, agree a repayment schedule, and pay interest on the outstanding balance. Most SME term loans amortise — capital and interest in equal monthly instalments. Some are interest-only with a bullet repayment at maturity. A handful sit somewhere in between with capital holidays at the start.

UK term loans split broadly into three buckets:

• Unsecured loans — usually £25,000–£500,000, often through challengers (Funding Circle, iwoca, Allica, Tide), priced 7%–14% APR. Typically backed by a personal guarantee.
• Secured commercial loans — £250,000 and up, secured against property, plant, or a debenture over the business. Cheaper, slower, and far more demanding diligence.
• Acquisition and structured loans — for buy-outs, mergers, or shareholder transitions. Often layered with mezzanine, vendor loans, or equity.

Fit

When it works well.

Term loans are the right tool for a defined, one-off cost with a known payback period:

• Buying equipment or vehicles where the asset will earn over five-plus years.
• Buying premises via a commercial mortgage (which is structurally a long-dated term loan).
• Acquiring another business where the target's cash flow services the debt.
• Funding a discrete growth investment — a new site, new product line, expansion into a new region.
• Refinancing more expensive borrowing — replacing card debt, MCAs, or short-term facilities with a single longer-term loan.

The shape that works: a clear use of funds, a forecast that shows the loan being serviced from operating cash flow with margin to spare, and either a robust trading record or strong asset cover.

The honest part

When it's a bad idea.

Term loans go wrong when they're used to solve the wrong problem:

• Working capital gaps. A term loan injects cash once and then becomes a fixed cost. If the underlying issue is slow-paying customers or stock cycles, it'll be back in twelve months — except now there's a debt service line as well.
• Loss-making businesses. Loans don't fix structural margin problems. They buy time, then run out.
• Capital you can't realistically repay on schedule. If the deal only works on best-case forecasts, expect a covenant breach inside year one.
• Short-term needs. A 5-year loan to fund a 6-month project means paying 4.5 years of interest for nothing.
• Avoidance of equity. Some businesses load on debt to avoid dilution. There's a level beyond which that destroys value rather than preserves it.

The biggest under-appreciated risk: personal guarantees. Most unsecured SME loans require a PG, often for the full loan amount. Directors regularly sign without reading. If the business fails, the lender pursues your home.

Cost

Real costs.

Component	Typical range
Unsecured SME loan (challenger banks/fintechs)	7%–14% APR
Unsecured SME loan (high street, where available)	6.5%–10% APR
Secured commercial loan (debenture or property)	5.5%–9% APR
Commercial mortgage (owner-occupied)	5.5%–8% APR
Acquisition / leveraged loan	SONIA + 5%–9% margin
Arrangement fee	1%–4% of loan
Legal fees	£1,500–£15,000+ for secured deals
Early repayment fees	0%–6 months interest

Operational reality

Speed, complexity, certainty, flexibility.

Speed

Unsecured loans from challengers fund in days for small amounts (£25k–£100k) and 2–4 weeks for larger ones. Secured loans take 6–16 weeks because of valuation, legal work, and credit committee processes.

Complexity

Low for small unsecured loans — open banking, two years' accounts, basic ID. Medium-to-high for secured deals: full diligence on the borrower, property/asset valuation, debenture documentation, sometimes a full quality-of-earnings exercise for acquisition loans.

Certainty

Reasonably high once a credit-approved offer is on the table. The main delivery risk is conditions precedent: PG documentation, asset registration, intercreditor agreements with other lenders.

Flexibility

Limited. Once drawn, the schedule is fixed. Most lenders allow early repayment, often with a penalty in the first 12–24 months. Restructuring is possible but slow.

In the market

Who actually uses it.

The UK SME term loan market splits roughly between:

• High street banks — Barclays, Lloyds, NatWest, HSBC. Best pricing for established borrowers; appetite varies sharply by sector and loan size.
• Challenger and specialist banks — Allica, Aldermore, Cynergy, OakNorth. Strong on £250k–£10m secured lending where high street appetite is uneven.
• Fintech lenders — Funding Circle, iwoca, Tide, Capify. Fast, unsecured, smaller amounts, higher rates.
• Government-backed schemes — Growth Guarantee Scheme (post-RLS), Start Up Loans for under-£25k.
• Debt funds and direct lenders — for £5m+ deals, particularly acquisitions, where banks won't go.

Other options

Alternatives.

• Revolving credit facility / overdraft — better for fluctuating working capital than a term loan.
• Asset based lending — typically more capital available against the same business at similar pricing for £3m+ borrowers.
• Invoice finance — better for funding a growing receivables book than a fixed loan.
• Asset finance / hire purchase — for equipment specifically, often cheaper than a generic term loan.
• Equity — for longer-payback investments where servicing debt is genuinely a stretch.

Summary

Summary.

Term loans remain the workhorse of UK SME finance because the product is honest: a fixed amount, a known cost, a clear schedule. They go wrong when used as a substitute for working capital, when the repayment plan only works on optimistic forecasts, or when borrowers under-appreciate the personal guarantees they're signing.

Used well, they're the cheapest piece of structured borrowing most SMEs will access. Used badly, they convert a temporary cash problem into a five-year fixed cost.