How Do Small Business Loans Work?

Aine Hendron
23 Sep 2022

Small business loans can give your business the support and financial flexibility it needs to transform and revitalize its operations. Loans can improve your cash flow and future-proof your business. 

How do loans work? 

Depending on your lender, your loan can be used for various things: some lenders require a business plan before they offer payment, typically expecting that it’ll be used for branding and marketing, new point of sale software, or taking on new staff. Other lenders understand that your loan may be used for other things, such as paying off debts, unexpected business expenses, emergency repairs, and investing in trades and stock. 

Every loan process differs depending on the lender and borrower. Business owners will have to ask themselves a few questions before deciding on a lender. After all, acquiring a loan is more than simply receiving the money; you’ll also need to pay the money back. 

Understanding how the transaction works and becoming fully informed will make the lending process a lot simpler. 


All lenders have different criteria. These are the five criteria that lenders will consider when reviewing your eligibility for a loan:

  • Personal credit score
  • Business credit score
  • Borrowing history - whether or not you’ve been rejected a loan in the past
  • Personal and business tax returns
  • Balance sheets
  • Outstanding debts schedule [1]

Industry-specific loans

Find out if there any lenders which cater specifically to your specific field or industry. 

You’ll also need to make sure that the loan you’re considering is right for your business size. For example, a small business loan will look very different from a start-up business loan. 

Loan amount

You might have a set figure you’d like to borrow, but a lender might think you need a bit less. Many lenders will ask for a business plan to see what you will spend their money on. Giving a lender an idea of how that money will be used can work well in your favour, as it means you are more likely to secure the total amount. 

Long-term or short-term?

It helps to consider the exact terms you would ideally like to see a lender offer. Have you considered how you’d like to repay - monthly payments, a small percentage of all card transactions, or lump sums? Are you willing to consider an alternative repayment plan if your preferred option isn’t available? 

Many lenders will have some flexibility with their terms. It’s imperative that once terms are agreed upon, you try your absolute best to uphold your side of the contract. 

Some lenders will offer long-term payments for large expansion plans, while others will provide one-year loans to cover new employee costs, for example. 

What to look for in a lender

Capify, UK lending experts, advises small businesses to consider the following when selecting a lender: 

  • Check out their customer service. Can you get them on the phone when you need them? 
  • Are they good at explaining terminology and answering your questions?
  • Make a note of perks and benefits. Will you get any extras, like online account management?
  • Can you raise finance with them again? If they’re good to work with, you might want to apply for another loan in the future. [2]
  • What are the consequences of missed or late payments?

Advantages and disadvantages of small business loans

There are pros and cons to small business loans. 


  1. Getting a business loan can accelerate the growth of your business. Positive cash flow allows companies to take advantage of business opportunities and execute plans sooner than they could without additional funding.
  2. Loans are temporary and often come with fixed rates. Unlike investments, where money is invested in exchange for a portion of the business, once a loan is paid off, there is no more obligation to the lender [3]. 
  3. Most loan services include guidance from a financial advisor, who ensures that you are spending and investing wisely. Expert support from experienced advisors will provide the assurance that you’re getting the best value from your loan. 


  1. Some loans require a guarantee. Secured loans require a guarantee that repayments will be made or risk losing ownership of certain assets owned by the business for collateral. This could be the business premises or vehicles, for example. If there are no assets tied to the business, lenders might ask for a personal asset for collateral, such as the owner’s house. While businesses shouldn’t take out loans and expect not to return them, it’s good to identify the terms and conditions of the loan and prepare for the unexpected. 
  2. You mightn’t receive as much as you need, or the timeframe for repayment may not be what you anticipated. Lenders evaluate how much money they are willing to provide and over what period of time, based on the information you provide. It’s possible that they won’t offer as much as you are asking for, if you are eligible at all. 

Conduct proper research before deciding that you definitely want a loan. In some cases, there may be other financing options available for your business. Search for any grants that your business might be eligible for first. These could be related to the revenue your business collects, the number of employees you have, your business location, industry, your current marketing strategy, or your online trading situation. 

Improve financial management with POS

Epos Now’s point of sale (POS) software is designed with small business owners and managers in mind. Knowledge is power when it comes to your business’s financials, which is why our software provides detailed insights that pinpoint where your revenue is coming from and where your liabilities are. The profitability of your business is analyzed and reports are produced showing your most profitable inventory/services, along with performance over time, sales trends, and labor reports. Polish your pricing plan and make better-informed business decisions with a dedicated POS system

Manage your stock with ease with Epos Now. Check your inventory in real-time, as it updates live, as products are being sold in-store, or through your e-commerce platform. Our software and systems are available through a monthly payment plan and are extremely affordable, as we want to close the gap between retail giants and small startups. Learn more about POS, or request a callback from our experts today.