A business loan is a sum borrowed for business purposes and repaid with interest over an agreed term. In the UK the main government-backed options in 2026 are the Start Up Loan (£500 to £25,000 at a fixed 7.5% a year over 1 to 5 years) and the Growth Guarantee Scheme (up to £2 million per business group through accredited lenders). For tax, interest is generally deductible from profits, but repayments of the capital borrowed are not.
What counts as a business loan
A bank loan, in the business sense, is a contract in which a lender advances money to a business and the business agrees to repay it, with interest, on set terms. The main variants are:
- Term loan. A fixed sum repaid in instalments over a set period, usually to buy assets or fund growth;
- Overdraft or revolving credit facility. A limit the business can draw and repay as needed, for short-term working capital;
- Asset finance. Borrowing secured on the equipment or vehicles it pays for;
- Invoice finance. Advances against unpaid customer invoices;
- Commercial mortgage. A long-term loan secured on business premises.
Lenders may take security over assets and often ask directors of small companies for personal guarantees. A guarantee makes the director personally liable if the company defaults, so it removes much of the protection that limited liability otherwise gives.
Government-backed loans in 2026
Start Up Loans. According to GOV.UK, the scheme offers a government-backed loan of £500 to £25,000 to start or grow a business. It is "an unsecured personal loan", not a business loan, so the individual borrows and must pass a credit check. Applicants must live in the UK, be 18 or over and have, or plan to start, a UK-based business that has been fully trading for less than 5 years. The fixed rate is 7.5% a year, the term is 1 to 5 years, and there is no application fee and no early repayment fee. Successful applicants get up to 12 months of free mentoring.
Growth Guarantee Scheme. The British Business Bank administers this scheme for the Secretary of State for Business and Trade. It provides up to £2 million per business group as term loans, overdrafts, asset finance, invoice finance or asset-based lending through accredited lenders. The business must trade in the UK, have turnover of no more than £45 million, earn more than 50% of turnover from trading activity, be viable and not be a business in difficulty. The government gives the lender a 70% guarantee; it does not reduce what the borrower owes. In July 2026 the government announced that the turnover limit will rise to £54 million and the maximum term from six to 10 years for loans up to £1.1 million. The announcement gave no start date, so until the GOV.UK scheme page changes, the £45 million and six-year limits still apply; check with the lender whether the changes have taken effect. The scheme is the Recovery Loan Scheme extended and renamed at Spring Budget 2024, as our guide to the Recovery Loan Scheme and what replaced it explains.
How loans are taxed
The tax treatment differs between the interest and the capital.
- Companies. Under section 297 of the Corporation Tax Act 2009, debits on a loan taken out for the purposes of the trade, including interest, "are treated as expenses of the trade which are deductible in calculating those profits";
- Sole traders and partnerships. Section 29 of the Income Tax (Trading and Other Income) Act 2005 provides that "interest is an item of a revenue nature, whatever the nature of the loan", so interest on a business loan is deductible under the normal rules;
- Capital repayments. Repaying the sum borrowed is not an expense. The loan itself was not income when received, so repaying it does not reduce profit;
- Large groups. The corporate interest restriction gives every group a de minimis interest capacity of £2 million a year, so it does not affect most SMEs.
A Start Up Loan is a personal loan, so the debt stays with the individual even if the money goes into a limited company. Record how it goes in, as a loan from the director or as share capital, so the company's books match reality; our guide to lending money to your own company covers the options.
Consumer credit protection for small borrowers
Lending to a limited company is not regulated consumer credit. Lending to sole traders, partnerships of two or three partners and some unincorporated bodies can be, because the Consumer Credit Act 1974 treats them as "individuals". There is an important exemption: a credit agreement is exempt where the credit exceeds £25,000 and the agreement is entered into "wholly or predominantly for the purposes of a business". Below that, an unincorporated borrower can have the protection of FCA consumer credit rules.
Worked example: what a loan really costs
A trading company borrows £60,000 over five years to buy equipment and pays £11,500 of interest over the term. Its corporation tax position is:
- Interest. The £11,500 is deducted from trading profits as it accrues, spread across the five years;
- Capital. The £60,000 repaid is not deductible;
- Equipment. The machine bought with the loan is relieved through capital allowances, not through the loan.
The cash cost of the loan, roughly £1,192 a month on average, is much higher than the profit and loss charge. That gap explains why a business can report a profit and still run short of cash while it repays debt.
Before you apply
- Forecast. Prepare a cash flow forecast showing repayments are affordable even if sales are slower than planned;
- Accounts. Have up-to-date management accounts and the last filed statutory accounts ready;
- Purpose and term. Match the term to the asset's life, and use overdrafts for short-term gaps, not long-term investment;
- Security and guarantees. Read what is being secured and what you are personally guaranteeing;
- Alternatives. Consider equity, grants or asset finance where a loan would strain cash flow.
The figures above come from GOV.UK's Start Up Loan and Growth Guarantee Scheme pages, the July 2026 expansion announcement, section 297 CTA 2009, section 29 ITTOIA 2005, section 392 TIOPA 2010 and article 60C of the Regulated Activities Order. See also our guide to working capital optimisation.
A lender will judge your application on the numbers you show them. Our financial modelling team can build a lender-ready forecast, and our management accounts service keeps the figures current for covenant reporting.