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Most UK business loans are "repayment" or "amortising" loans: every monthly payment is a blend of interest and capital, and the balance shrinks steadily to zero by the end of the agreed term. The formula lenders use is M = P × r × (1+r)ⁿ ÷ ((1+r)ⁿ − 1), where P is the amount borrowed, r is the monthly interest rate (annual rate ÷ 12), and n is the number of monthly payments over the term. Early in the term, most of each payment goes toward interest; by the final payments, most goes toward capital — the balance simply hasn't been paid down yet, so more interest accrues on it early on.
An interest-only loan works differently: your monthly payment covers only the interest due on the full outstanding balance, which never reduces during the term. At the end, the entire amount originally borrowed is still owed as a single lump sum, often called a "balloon payment." Monthly payments are noticeably lower — helpful for cash flow in the short term — but you need a clear plan for how that final lump sum will be repaid, whether from savings, refinancing, or the sale of an asset the loan helped fund.
Total interest paid over the life of a repayment loan is always lower than on an equivalent interest-only loan at the same rate and term, because a repayment loan's outstanding balance — and therefore the interest accruing on it — steadily falls, while an interest-only loan's balance stays at the full amount throughout, generating interest on the same full sum every month until the end.
With the Bank of England base rate holding at 3.75% as of the September 2026 decision, business loan pricing sits well above that base, since lenders add a margin to cover their own funding costs and the credit risk of lending to a smaller, often unincorporated, borrower. Unsecured business loan APRs in 2026 broadly range from about 6% for the strongest, most established businesses through to 20% or more for businesses with a short trading history or a weaker credit profile.
Alternative and fintech lenders such as Funding Circle often advertise headline rates from around 6.9% APR for the best-qualified applicants, while high-street banks tend to quote representative APRs in the 8.6% to 14.9% range. In 2026, a loan under roughly 10% APR is generally considered "low interest" for unsecured business borrowing; anything meaningfully above that reflects either a shorter trading history, lower turnover, weaker credit score, or a higher-risk sector.
It's worth remembering that an advertised "representative APR" only has to be offered to 51% of successful applicants by law — the rate a specific business is actually quoted can be noticeably higher or lower depending on its own financial profile, so the figure in an advert is a guide rather than a guarantee.
A secured business loan is backed by a specific asset — commercial property, equipment, invoices, or sometimes a director's personal guarantee — which the lender can claim if the loan isn't repaid. Because this lowers the lender's risk, secured loans usually carry a lower interest rate and can allow for larger loan amounts and longer terms. An unsecured loan doesn't tie up a specific asset, is generally faster to arrange, but carries a higher rate to compensate the lender for the extra risk, and lenders will look harder at trading history, turnover, and credit score before approving one.
The Growth Guarantee Scheme (GGS), run by the British Business Bank, sits alongside ordinary commercial lending rather than replacing it. It gives the lender — not the borrower — a 70% government guarantee against losses if the business defaults, which can make a lender willing to approve a loan, or offer a larger one, in situations where it would otherwise decline to lend without security. It's available to UK-trading SMEs with turnover up to £45 million, and as of 2026, loans of up to £1.1 million under the scheme can run for terms of up to 10 years, up from a previous six-year cap. The scheme runs through accredited commercial lenders rather than being applied for directly through government, and has been extended to March 2030.
Importantly, the GGS guarantee doesn't automatically mean a cheaper interest rate — the borrower is still responsible for repaying the full loan, and the lender still sets its own rate based on its normal risk assessment. What it changes is the likelihood of approval and the amount or term a lender is willing to offer, not the underlying cost of borrowing.
Take a small business borrowing £50,000 at 9.5% APR over a 5-year (60-month) term, with a 2% arrangement fee. On a standard repayment basis, the monthly interest rate works out to roughly 0.79% (9.5% ÷ 12), and applying the amortisation formula gives a monthly repayment of approximately £1,050. Over 60 months, that totals around £63,000 repaid, meaning roughly £13,000 in total interest on top of the £50,000 borrowed — before the arrangement fee. The 2% arrangement fee on £50,000 adds a further £1,000, either taken upfront or added to the balance, bringing the true total cost of borrowing closer to £14,000.
Now compare that with the same £50,000 at the same 9.5% rate, but taken as an interest-only loan over the same 5-year term. The monthly payment is just the interest on the full £50,000 balance — around £396 a month, noticeably lower than the £1,050 repayment figure. Over 60 months that's roughly £23,750 in total interest — nearly double the repayment loan's interest cost — plus the business still owes the full £50,000 as a lump sum at the end of year five. The lower monthly outgoing comes at the cost of a much larger total interest bill and a significant final repayment that needs its own funding plan.
This example illustrates why the "cheapest-looking" monthly payment isn't always the cheapest loan overall: a business with genuinely tight short-term cash flow might still rationally choose the interest-only structure despite its higher lifetime cost, but it should do so with eyes open about the balloon payment waiting at the end, not simply because the monthly figure looks more comfortable today.
Lenders price business loans primarily on perceived risk of non-repayment, which they assess through a combination of factors. A longer trading history — typically at least two full years of accounts — signals stability and usually unlocks meaningfully better rates than a business trading for only a few months. Strong, consistent turnover and healthy cash flow (rather than turnover alone) reassure a lender that repayments are affordable month to month, not just theoretically covered by annual profit.
Both business and, for smaller companies and sole traders, personal credit scores are checked, since a director's personal credit history is often taken as a proxy for financial discipline when the business itself has limited credit history of its own. The sector matters too — some industries are considered inherently higher-risk by lenders (hospitality and construction, for example, have historically faced higher average rates than professional services) due to sector-wide volatility rather than anything specific to the individual applicant.
Practical steps that can improve the rate offered include building up at least 12-24 months of clean business banking history before applying, keeping personal and business credit files free of missed payments, offering security or a personal guarantee where comfortable doing so to access secured-loan pricing, and shopping quotes from more than one lender type — a specialist alternative lender and a high-street bank can price the same application very differently.