How business lending works: a beginner's guide
By Helm, Funding Specialist
- Business lending gives you capital now that you repay over time
- Different products have very different repayment structures
- The total cost depends on the type, amount, and your risk profile
- Alternative lending is simpler and faster than bank lending
- Understanding the basics helps you avoid costly mistakes
Business lending, at its simplest, is borrowing money for your business and paying it back over time with a cost attached. But behind that simple definition lies a range of products, structures, and terms that can be confusing if you are new to it.
This guide explains how business lending works in straightforward terms, without jargon or complexity.
The basic mechanics
Every business lending product follows the same basic pattern: you receive a sum of money, use it for your business, and then repay it plus a cost over time. The differences between products come down to three things: how the cost is calculated, how repayments are structured, and what the lender requires from you.
How costs are expressed
Different lending products express costs in different ways, which can make comparison confusing.
| Cost Type | How It Works | Used By |
|---|---|---|
| APR (Annual Percentage Rate) | Annualised cost including fees | Bank loans, online lenders |
| Factor rate | Multiplier on the borrowed amount (e.g. 1.25) | Merchant cash advances |
| Flat fee | Fixed cost as a percentage of amount | Revenue-based finance |
| Discount rate | Percentage deducted from invoice value | Invoice finance |
| Monthly rate | Simple monthly percentage | Some online lenders |
How repayments work
Repayment structures vary significantly between products.
- Fixed monthly payments: same amount every month (bank loans)
- Daily card-based payments: percentage of card sales (MCAs)
- Revenue-based payments: percentage of total revenue (RBF)
- Interest-only: pay interest only, repay principal at end (some secured loans)
- Bullet payment: repay everything at once at end of term (bridging loans)
What lenders look at
Different lenders assess different things, but most consider some combination of:
- Your monthly or annual business revenue
- How long you have been trading
- Your personal and business credit history
- Whether you have assets to offer as security
- The stability of your income over recent months
- Your existing debts and financial commitments
The application process
For alternative lenders, the process is typically: apply online, upload or share your financial data, receive an offer, sign, and receive funds. The whole process can take as little as 24 hours.
For banks, expect a longer process: complete detailed forms, provide full business accounts and projections, attend meetings, wait for credit committee approval, and then wait for funds. This can take several weeks.
Key terms to understand
Here are the most important terms you will encounter.
- Principal: the amount you borrow
- Factor rate: the multiplier that determines your total repayment (MCA)
- APR: the annual cost of borrowing expressed as a percentage
- Personal guarantee: a promise to repay personally if the business cannot
- Collateral/security: assets pledged to secure the loan
- Repayment split: the percentage of daily card sales taken as repayment (MCA)
Frequently asked questions
What is the simplest form of business lending?
Merchant cash advances are arguably the simplest. You receive money, and a percentage of your daily card sales repays it automatically. No fixed payments, no deadlines.
Do I need an accountant to apply for business lending?
Not for most alternative lending products. For bank loans, having an accountant prepare your figures can help. For MCAs, your card processing data is usually sufficient.
What happens if I cannot repay?
This depends on the product. With an MCA, if you stop trading, repayments stop. With a bank loan, the lender may pursue you (especially if there is a personal guarantee).
Is business lending the same as a personal loan?
No. Business lending is designed for business purposes and is assessed based on your business performance. Personal loans are based on your personal income and credit.