Key points
- For a sole trader there is no legal line between business and personal debt: the owner is liable for all of it.
- Lending of £25,000 or less to sole traders and small partnerships is regulated, with extra protections.
- Providers lending to very small companies rely on the owner's credit history and a personal guarantee.
- Bounce Back Loans are in repayment for most borrowers; check with your lender what flexibility remains.
- Free, impartial help is available from Business Debtline. This site provides information only.
Cash-flow realities for small businesses
A micro business rarely has a finance function. The owner raises the invoices, pays the suppliers and decides which bill waits. Business and personal money are intertwined: the business card pays for the weekly shop, a personal card covers a stock order, and drawings flex with whatever is left.
Security is limited. There is usually no property and little resaleable equipment, so lenders look at the owner. A sole trader's credit file is the business's credit file, and even for a limited company the director's history and a personal guarantee often matter more than the accounts.
Many small businesses are still repaying a Bounce Back Loan. Those loans came with Pay As You Grow options, which at the time allowed borrowers to extend the term to ten years, take interest-only periods or pause repayments once. Check with your lender what remains rather than assuming they are still open.
Regulated and unregulated lending
Credit agreements of £25,000 or less with sole traders, partnerships of two or three people and unincorporated bodies are regulated under the Consumer Credit Act. The provider must be FCA-authorised and follow its rules on affordability, pre-contract information, arrears and complaints, which may include access to the Financial Ombudsman Service. Lending to limited companies and LLPs generally falls outside that regime.
Finance options that fit small businesses, and why
Unsecured loans
An unsecured business loan is the most common route for a trading business that needs a lump sum. Approval rests on affordability, trading history and credit history. Rates are higher than for secured lending, and a company director will almost always be asked for a personal guarantee.
Consolidating small facilities
Small businesses accumulate small debts: a credit card, an overdraft, a merchant cash advance and a short loan taken in a difficult month. Together they can consume most of the cash. Consolidating business debt into a single loan can simplify the outgoing and replace revolving credit with a fixed end date. A longer term lowers the monthly figure but usually raises the total repaid, and cleared credit lines must not be used again. See business credit card debt and overdraft debt.
Cash flow finance
Where the problem is timing, such as slow-paying customers or a seasonal dip, cash flow finance may fit better than a loan, provided it bridges a gap in receipts rather than funding a loss.
When a personal route may be cheaper
Because a sole trader is personally liable either way, a personal loan is sometimes cheaper than a business loan, particularly where the business is young and the owner's credit record is strong. The debt then sits on the personal credit file, the interest may be harder to treat as a business expense, and mortgage affordability falls. Keep a written record of what was borrowed for the business.
Start Up Loans for very young businesses
Businesses trading for only a short time, or not yet trading, may find conventional lenders unwilling. The Start Up Loans programme, delivered through the British Business Bank, provides government-backed personal loans for business purposes at a fixed rate. Terms are published at startuploans.co.uk. We have no connection with it.
Risks specific to small businesses
Personal guarantees. For a small company, a guarantee means limited liability does not apply to that debt. If the business fails, the lender can pursue the director's savings and sometimes their home. Take independent advice before signing.
Blurring personal and business borrowing. Using personal cards for the business, and business facilities for personal spending, hides the true position, creates tax complications and, for a company, affects the director's loan account. Separate accounts and a monthly list of every debt come first.
Questions to ask before you borrow
- Is this agreement regulated, and what protections does that give me?
- What is the total repayable over the term, including fees?
- Will I be asked for a personal guarantee, and what does it put at risk?
- Is the business profitable enough to repay, or is borrowing delaying a harder decision?
Where to get free help
Business Debtline is a free, impartial service for the self-employed and small businesses in England, Wales and Scotland. HMRC can be contacted about tax arrears through GOV.UK. If debts cannot be paid as they fall due, consult a licensed insolvency practitioner or authorised debt adviser. Finance Business Debt provides information and, at your request, may introduce you to third-party providers; it does not give debt advice.
If past missed payments are a concern, read whether a business can refinance with bad credit. Retail and hospitality businesses have their own pages on the industries overview.
Frequently asked questions
Can I still use Pay As You Grow on my Bounce Back Loan?
The options were offered for a defined period and some have been withdrawn or used up. Contact your lender to confirm what remains, and if repayments are unaffordable, say so early.
Does my personal credit score affect a business loan?
For sole traders, yes, directly. For small companies, providers usually check the director's personal file alongside the company's.
Should I consolidate business and personal debts together?
A sole trader can, since the liability is personal in both cases. Keep records of which amounts related to the business. A company's debts should not normally be mixed with personal borrowing.
Is a Start Up Loan a business loan?
It is a personal loan for business purposes, delivered through the British Business Bank's programme. The borrower is personally responsible for repayment.