An introduction to commercial lending – Getting to grips with the basics

Even the most successful of businesses may sometimes require a cash injection, whether in the short term to purchase new equipment, hire staff or pay vital expenses, or a longer-term arrangement, for instance to secure a new premises. One way of obtaining the money required is via a commercial loan, a loan advanced to a business by a financial institution or other lender, rather than to a consumer.

Whatever your objectives for your business, this guide to commercial lending offers an overview of the various types of commercial loans available, and the different situations for which they might be appropriate. If you are seeking loan finance for your own business, we hope this guide gives you a greater understanding of the available options.

Asset finance is a short-term funding solution that enables a company to use assets it already owns (for example, investments, stock, machinery or even property) as collateral against a loan, or to purchase or use an asset without having to pay upfront (e.g., hire purchase or equipment leasing). For example, a logistics business might use its fleet of vans or lorries as security to borrow money, while a printing company might opt for a hire purchase agreement to spread payments for a new printing press across a set period.

Asset finance may suit businesses seeking a short-term solution to raise capital or acquire new equipment without a significant initial outlay.

Invoice finance is when a lender uses an unpaid invoice as security against a loan. The funding will constitute a percentage of the invoice amount; the exact percentage will depend on the particular lending requirements of the given financial institution. When a business raises an invoice, the lender will advance them the agreed percentage and collect it when the client pays the invoice (minus a fee). There are two main types of invoice finance – factoring and invoice discounting.

With factoring, the lending institution will take the invoice payment from your clients directly, deduct a service fee, and provide you with the outstanding balance. With invoice discounting, you retain control of the invoicing process and the lender will discount the fee from your advance. The benefit of factoring is that your lender will take responsibility for invoice payments, including chasing clients for late payments. The disadvantage is that your clients will know about your loan arrangements. Invoice discounting, on the other hand, is confidential as you retain control of the invoicing process.

There are a wide range of risks against which businesses need to protect themselves, which is where insurance comes in. While employers’ liability is the only type of insurance that is mandatory under UK law for any business that employs staff, business insurance policies often include other key types of cover, such as:

• Public liability – covers a business for compensation payments and/or legal costs if a member of the public (for example a customer, supplier or passerby) makes a claim because they’ve been injured, or their property has been damaged because of the business

• Professional indemnity – covers a business or individual for the costs incurred if a client claims you made a mistake or were negligent during your work for them, causing them financial or reputational damage

• Buildings and contents insurance – covers a business for damage to its premises, equipment, stock or any other contents

Business insurance is often flexible and can be altered to add other types of cover your business may need, including cyber insurance, business interruption cover and even terrorism insurance.

Bridging loans do what they say on the tin; they provide businesses with the money they need to ‘bridge the gap’ while they are waiting for another source of funding. Some common reasons why a business might use bridging finance include:

•            Purchasing a new premises while waiting for an existing property to sell

•            Paying for stock which the business will then sell on to customers

•            Developing an unhabitable property (where the business is unable to secure normal mortgage finance)

There are four types of bridging loan – closed (which must be repaid within a set timeframe), open (which has no fixed repayment date), first charge (the lender receives its money before any other lenders if the borrower defaults) and second charge (the lender only receives its money after all liabilities to the first charge lender have been fulfilled). Open and second charge loans are likely to attract higher interest due to the comparative risk for the lender.

Many businesses are highly dependent on certain members of staff, without whom they would struggle or fail to operate. Key person insurance is designed to protect businesses against the financial loss that would be incurred if this key individual passed away during the policy term or was unable to work due to a critical or terminal illness.

When defining a key person, you’ll want to think about the skills, knowledge and experience that are essential to keeping your business running, and then about the people within your business (whether a director, an employee or anybody else) who possesses those skills. The amount of cover a business takes out and therefore the premiums they pay, will depend on a number of things, including the cost of replacing them, how long the business could last without them (if they became ill) and the total profit they generate.

A cross-option agreement protects a business by ensuring its shareholders can buy back the shares of a shareholder who has passed away or become critically ill. This prevents situations such as, for example, the deceased shareholder’s family refusing to sell the shares or             wanting involvement in the business that the surviving shareholders aren’t happy with.                   

Cross option agreements can be tailored to suit a shareholders’ unique circumstances. For example, shareholders can take out insurance on each other’s lives to ensure they have the funds to purchase the shares when called upon to do so.     

One way of growing your company’s cash reserves and raising income is to invest capital reserves that are not required in the day-to-day running of the business, in order to protect them against inflation and a low-rate environment. This can be achieved in several ways, including via:

We can arrange the finance to assist in purchases or refinance on existing holdings.

In April 2021, the government introduced the Recovery Loan Scheme (RLS) to help businesses recover from the pandemic. Under the RLS, businesses with a turnover of £45m or less that had been affected by the pandemic could borrow up to £2m in the form of a term loan, an overdraft, invoice finance or asset finance. The RLS offered lenders a government-backed guarantee against the outstanding balance of the loan.

In April 2025, the government announced its replacement, the Growth Guarantee Scheme (GGS), which made approximately £500m of additional lending available to help smaller businesses across the UK that may need cashflow support due to changes in global tariff rates.

To be eligible, your business must:

As commercial finance will be secured against property, assets or other collateral, these are at risk if you default on a lender’s requirements. Please note Commercial lending is on a referral basis only. Commercial Lending is not regulated by the Financial Conduct Authority.

It is important to take professional advice before making any decision relating to your personal finances. Information within this document is based on our current understanding and can be subject to change without notice and the accuracy and completeness of the information cannot be guaranteed. It does not provide individual tailored investment advice and is for guidance only. Some rules may vary in different parts of the UK. We cannot assume legal liability for any errors or omissions it might contain. Levels and bases of, and reliefs from, taxation are those currently applying or proposed and are subject to change; their value depends on the individual circumstances of the investor. No part of this document may be reproduced in any manner without prior permission.

Approver Quilter Financial Services Ltd & Quilter Mortgage Planning Ltd 20/08/2025