Debt financing — borrowing money to fund a business and repaying it over time with interest — is one of the most widely used forms of business funding. A business loan is the most common form of debt finance, and understanding how business loans work, what they cost, and when they are appropriate helps founders evaluate whether this route is the right fit for their particular situation and needs.
A business loan is a sum of money borrowed from a bank, alternative lender, or government-backed scheme and repaid over a defined period with interest. Loans may be secured against business or personal assets, or unsecured. Secured loans typically carry more competitive terms but put assets at risk if repayments are missed. The total cost depends on the interest rate, repayment term, and any associated fees. Eligibility is assessed based on creditworthiness, trading history, and the financial position of the business.
Business loans suit defined purposes such as funding equipment, covering a working capital gap, or financing a specific growth initiative, rather than ongoing operational costs. Taking on debt increases financial obligations regardless of business performance, so understanding the repayment schedule and stress-testing it against realistic revenue scenarios is important before committing. Our guide to business loans for UK founders covers the main types available and what lenders typically look for.