If you run a limited company, it’s likely that one day you’ll need extra financing to help grow your business. So knowing how limited company business loans work will prove useful to you - either today or in the future.
We’ve put together this in-depth guide on everything you need to know about securing a limited company loan (ltd company loan)—including the types of loan available and how you can qualify for one.
What are limited company loans?
Limited company loans are a popular way for limited companies to finance building out their product, team, marketing, or inventory. The loan is either secured or unsecured. Secured business loans require you to offer assets such as property or equipment as collateral against the loan.
Businesses can borrow more with secured business loans, and these loans usually offer better interest rates and longer repayment terms. That’s simply because lenders see them as less risky than unsecured loans.
Unsecured loans for limited companies do not require you to place personal assets or business assets as collateral meaning you won’t lose them if you’re unable to make repayments.
Obviously, it depends on the lender, but limited company loans can vary from $5,000 - $500,000. Many lenders will let you borrow up to 15% of your company’s annual turnover.
Some limited companies benefit from choosing a secured loan with lower interest, and as a result reduce their outgoings over the loan’s lifetime. This makes the loan easier to pay back quickly.
How a limited company business loan can help your business
Businesses will typically use business loans to fund research, expansion into new regions, marketing efforts, and/or hiring. All these activities are important parts of growing a business, but not all of them are best funded by a limited company loan.
In fact, limited company loans are best suited for activities that are likely to produce a quick return, like funding advertising or buying inventory.
These benefits include:
- Varying interest rates (depending on provider, intended use of capital, the business's track record, and whether any security is provided)
- Quick access to funds (some online providers offer funding within 24-48 hours.
- Ability for business owners to keep ownership of their business
Who is eligible for a limited company loan?
The first requirement for getting a limited company loan is that your business is registered as a private limited company.
In the UK this means registering with the Companies House. In the US, your registration steps are determined by the state you set your business up in but usually involves the Secretary of State’s office or a business bureau. Some states, like Delaware, are more popular for businesses to register in because of their low setup fees and business taxes.
Other lenders, such as banks, may require that:
- You've been trading for 6-12 months (time frame varies between lenders)
- You're turning over £10,000 per month on average (UK)
- The business owner is over 18 years of age
- Your business doesn't have bad credit
If your business is a limited liability partnership (LLP), your lender may ask you for a personal guarantee. Any stakeholders and directors with at least 20-25% stake in the business may be expected to secure the loan against personal assets, such as your house. In the case that the loan defaults, the lender would take ownership of your security.
If you do apply it’s important to know that lenders are more interested in the capital, assets, and revenue of a company than the industry they operate in. Any business with a proven model and predictable revenue is likely to be approved.
Can a new limited company get a business loan?
Lenders see new businesses as a riskier investment due to their limited trading history. In fact, many lenders will require you to have been trading for a minimum of six months. Of course, this makes it more challenging for new businesses to access a limited company loan.
Most lenders also will require you to have a minimum annual turnover amount which can be a difficult requirement for new companies to meet.
It’s not impossible for new limited businesses to get a business loan but it may be easier for these companies to access a startup loan instead.
Do you need good credit to apply for a limited company loan?
To put it bluntly, yes, a poor credit rating might limit your ability to get accepted by traditional lenders like banks.
Your private limited company has a credit score of its own but lenders will also look into personal credit records of the business's partners and directors. So, both your business and personal credit rating can impact loan approval as well as the amount of financing that you can qualify for.
What should you use limited company loans for?
Most types of limited company business loans are flexible, meaning you can use them for any business-related expense. The additional funding can help your company get through a slow sales period or boost your business growth by purchasing property or additional machinery.
Because the lender is unlikely to introduce conditions for how you spend your loan. Unlike some other funding options such as inventory loans, you can spend it as you like. Below are some of the most common ways to use a limited company loan.
- Fund business growth and expansion
- Recruit additional staff
- Purchase inventory
- Expanding premises
- Renovation/refurbishment of current premises
- Invest in new equipment and machinery
- Ease corporation tax payments
- Marketing and advertising
- Improve cashflow
You'll notice these are usually larger, one-off expenses, rather than part of the day-to-day running of the business. Day-to-day expenses will come out of the business's existing cash flow rather than a business loan.
How limited company loans work
To apply for a limited company loan you’ll need to find lenders and fill out an online form. You will be required to provide all necessary details to verify your business, including the registered name of your limited company, your registered number and SIC code (or US equivalent).
You'll also be asked to provide:
- Contact details
- How long your business has been running for
- Monthly/annual turnover
- The amount you are looking to borrow
Once your loan is approved, the lender will get in touch with the terms and conditions of the loan and the quote, which includes the interest rates, loan terms and repayment details.
From there, it’s up to you to review and agree to the terms. You will then be sent the terms of the agreement. Once both parties have signed, the loan will be transferred into your business bank account.
After receiving the money, you are required to make fixed monthly repayments at a pre-agreed interest rate until the loan is paid off in full.
If you require additional funding, some lenders offer the option to ‘top-up’ your loan—providing you have met your payments on time, and your business continues to perform. To do so you may be required to supply updated bank statements and financial documents.
Other limited company funding options
Business owners running limited companies may come into challenges with securing funding from traditional business loan lenders. Apart from more traditional limited company business loans, limited companies have a few other funding options.
- Revenue-based finance: Unlike a limited company loan, you don't pay interest. Instead, you pay back a fee for a pre-agreed share of your future revenue in monthly installments.
- Merchant cash advance: Much like revenue-based finance, the lender withdraws a pre-agreed percentage of your card sales.
- High street bank loans: This type of loan works best for more established limited companies. Banks have stricter qualifying criteria making them harder for small businesses to secure than with online providers. However, their interest rates are typically lower.
- Corporation tax loans: In the UK, all limited companies are required to apply for corporation tax within three months of being registered. For new businesses with limited cash flow, business tax payments can delay growth—corporation tax loans assist with paying the tax on time.
- Crowdfunding: This is a more modern approach to funding that relies on investment from people in return for debt, equity or another form of compensation. While it is a viable option, securing your funding target with crowdfunding is never guaranteed—it can also take a long time to raise funds.
Whatever business loan you choose, as a business owner, it's important to look into the range of options available to your company. And knowing which one suits you best starts with understanding your own financial situation, and how lenders are likely to perceive you.
At Uncapped, we offer investment capital with offers ranging from £10k to £5m through a revenue share agreement similar to a merchant cash advance. See if you qualify!