What Makes it a Business Loan? The Business Loan Definition

29-September-2023 15:03
in Commercial
by Sam Hodgson
Business Loan Definition

What is the definition of a business loan?

The definition of a business loan is money lent to a company which needs to be paid back, usually with interest, over a set period of time.

And yet obtaining finance for your business can seem overwhelming - getting the right finance for your business even more so.

There are so many terms thrown around that it can be confusing to understand what they all mean to determine what is a business loan and what isn’t. At Clifton Private Finance, we know what’s what.

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”Business” and “Loan”

It’s not too hard to understand either of these words. Dictionary.com defines “business” as:

To most of us, this means a company we work at in order to sell our services or goods to make money. As an aside, the word “business” is derived from an old English word “bisignis”, which means anxiety, as well as the middle English term “busy ness” meaning to be actively engaged with work. It is definitely true that running a business and looking to secure finance is linked to anxiety!

For its part, a “loan” is defined as:

The key part here when considering business finance is “on condition of being returned” and is the key difference between a loan and other types of finance. A loan is something you pay back.

What is a business loan, then? It’s a sum of money that is lent to your company that you will have to pay back, normally with interest.

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While you're here - want to know how much a business loan could cost you? 

Check out our business loan calculator below:

Business finance - the 11 best options

Related: How do business loans work? 

When is a Business Loan Not a Business Loan?

There are several types of business finance and they can often be bundled together as a “business loan” in common parlance. However, not all of them are loans.

Three of the most common types of finance that are confused for loans are grants, investments, and personal loans

Grant vs. Business Loan

The biggest difference between a grant and a business loan is that a grant doesn’t ever have to be paid back. It’s essentially money given to your company for free.

Of course, that’s not actually true - nothing in the world of business is ever truly free. However, grants do not have to be repaid by you and this means they break the definition of a business loan.

Grants can come in many forms, from direct cash grants that provide capital for your use, through to training courses that can be offered without a fee. 

Investment vs. Business Loan

An investment can provide a significant sum of capital to your business but it is not a loan.

Investments have their own terms, but tend to be structured around the idea that the investor injects money into the business to help it grow before selling their share of the company at (hopefully) a profit.

As with grants, investments do not follow the definition of a loan, and thus are not business loans. 

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Personal Loans vs. Business Loan

Many entrepreneurs will take out personal finance in order to kickstart their business or when they are looking to encourage growth. This may include, for example, remortgaging their home in order to obtain capital.

While these can easily be confused with a business loan, finance obtained as an individual and not under the name of the business doesn’t meet the definition of the “business” part, and is thus not a business loan.

Personal loans for business use should be undertaken with extreme caution as there is no limitation regarding your liability for that loan. A failing business that is being held up by your personal mortgage is a huge risk to your home.

Taking out a personal loan to funnel money into the business is actually a form of investment (by you) with a personal loan behind it, rather than a business loan. 

Case study: Our case study below details how we raised £300k working capital finance to aid a pharmaceutical company's growth:

How do business loans work

Other Finance that is Not a Business Loan

Other types of finance that are not technically business loans though they are valid types of business finance include:

  • Credit cards
  • Overdrafts
  • Vehicle leasing
  • Phone service contracts
  • Equipment leasing
  • Tax credits 

Different Types of Business Loans

Not all business loans take the same form.

With the numerous sources of business finance available, there are many different products on the market to fulfil many different needs.

Though it is by no means an extensive list, the following are all examples of business loans: 

Unsecured Business Loan

Perhaps the most common and easiest to understand is the simple unsecured business loan. This type of business loan is obtained by a financial institution, such as a bank, and is repaid regularly (typically monthly) with interest applied.

An unsecured loan has no guarantee for the lender and is considered a risk. Thus, factors such as your business credit rating and your business plan are used by the lender to assess suitability for the loan. 

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Secured Business Loan

The sibling to the standard unsecured loan, a secured business loan is tied to an asset of the business (for example, property or equipment) that is used as collateral to mitigate some of the risk of the loan. Like the unsecured loan, it is subject to interest and regular repayments are expected.

A commercial mortgage is one example of a secured business loan; asset finance such as a hire purchase agreement to purchase a van is another.

Lenders will do all they can to mitigate the risk of a loan but are far more likely to lend to companies with assets for a secured loan, as well as being willing to consider larger sums. 

Case study: Read our case study below on how we secured a £150k business loan for expanding a fitness gym 

How do business loans work

Merchant Cash Advance

This facility to draw capital in advance of expected card sales is a type of business loan available for B2C businesses with regular card transactions. It involves receiving a cash advance in return for a percentage cut on future card-based sales.

Learn more about MCA loans. 

Invoice Discounting

Invoice discounting is a form of loan provided based on existing accounts receivable - the amount owed to your company through already issued but unpaid invoices.

It provides a short-term solution for cashflow problems for B2B companies and is an efficient way to secure financing.

Our guide to invoice finance has a comprehensive explanation. 

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Business Bridging Loans

Often used for property acquisition and development, a bridging loan is a short-term loan designed to “bridge the gap” between the current need for finance and a known future capital income.

One example of a bridging loan is one provided to finance the purchase a property at auction before a commercial mortgage would be possible. Once the property is secured with the money supplied by the bridging loan, a mortgage can be applied for and used to pay off the bridging loan as soon as it comes through.

To learn about business loans for limited companies, watch our short video below.

Talking Business Loans with Clifton Private Finance

We’re experts at business finance and are here to help you understand the world of business loans and get the funding your company needs. Contact us today and speak to one of our experienced advisors - the finance you are after could be just around the corner.

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