Interest-free business loans

What is an interest-free business loan?

Interest-free business loans allow you to access capital without incurring interest on the amount borrowed. Getting a loan that doesn’t require you to pay interest is an attractive prospect, but they’re not easy to come by and often have other costs involved that take the place of interest payments, such as factor fees, which are applied in invoice financing and merchant cash advances.

Business finance agreements with interest-free loan repayments mean you don’t incur interest on the amount borrowed during the lending period, and the instalments you pay to spread the cost of the loan cover just the principal amount.

Some interest-free loan providers may have a cut-off point, after which you may then need to pay interest. For example, in a large-scale asset purchase, a lender may give you a 6-month (or longer) interest-free period. Or, say, when using a business credit card, you may not pay interest if you repay the amount of credit used by a specific payment cycle.

‍What types of interest-free business loans can you get?

There are a couple of main different types of interest-free loans you can explore, including revenue-based finance and loans from friends or family members. Here’s a brief summary:

• ‍Revenue-based loans: A merchant cash advance is an example of revenue-based finance, where you repay funds as a percentage of future card sales. Instead of paying interest, you pay a fixed fee for the facility (sometimes referred to as a factor fee). This means you know how much you need to repay, on top of the amount borrowed, from the start. This form of finance aligns with your cash flow and is ideal for retailers. 
• Loans from friends and family: Borrowing money from personal connections, such as friends and family, relies more on trust rather than credit checks and financial track records, making these loans more accessible and affordable. While you may not be charged interest, it’s wise to formalise the agreement to prevent any future issues or misunderstandings that may damage relationships.

Interest-free alternatives to business loans

Beyond simply business loans, there are other forms of interest-free borrowing options for businesses, from grants that don’t require repayment to equity finance options that involve offering a level of control and/or share of future profits.

• ‍Government grants: A business grant is a sum of money awarded to a company to support its growth and development that doesn’t need to be repaid and therefore has no required interest payments. These are typically available for start-ups and businesses in certain sectors, including technology and clean energy. Usually provided by the UK government or government-backed initiatives, grants are also awarded by local institutions and social enterprises to foster growth in the community for a particular cause or purpose. 
• Equity finance: Using equity finance offers businesses a source of funds that is not technically repaid and doesn’t incur interest, instead meaning offering a percentage or future profits, and equity share or a pre-agreed reward for the investment (such as in crowdfunding). Equity finance options include:
  
  • Venture capital
  • Angel investors
  • Crowdfunding platforms
  • Mezzanine finance (a combination of equity and debt finance)‍
• Supplier credit: You may have supplier relationships in which your supplier extends your payment schedule (to 60, 90 days, or longer), enabling you to defer payments to ease cash flow in certain periods or when awaiting pending or late client invoice payments. This can be deemed a form of interest-free finance, as you’re able purchase goods and services on credit without having to pay interest.

Interest-free loans vs. standard business loans

Below, we’ve provided a quick-glance comparison table to show you how interest-free loans compare with typical business loans over key lending factors:

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When should you consider an interest-free business loan?

Interest-free business loans are ideal for early-stage businesses or those with inconsistent revenues, as not having interest to worry about means more predictable cash flow, less financial burden and greater scope for growth.

Below, we outline the scenarios where interest-free loans are most suitable:

• Seasonal businesses: If you’re a business with large seasonal fluctuations, an interest-free business loan can relieve some of the burden of borrowing, and revenue-based financing is a common solution, as your repayments are directly linked to your sales volumes. So, you don’t have to worry about dips in revenue during the off-season affecting your ability to make loan repayments.
• Businesses looking to improve cash flow management: An interest-free loan can help with cash flow management, as it can give you the available working capital you need for key purchases and liabilities, like equipment upgrades or corporate tax bills, without the threat of escalating repayments.
• New businesses getting started: Sales forecasting can sometimes be challenging for newer businesses with limited historical data. So, getting an interest-free business loan or investment that doesn’t need to be repaid means you can access funds to keep operations ticking over and scaling with less financial pressure.‍
• Ambitious growing businesses: Whether it’s using revenue-based loans to avoid looming deadlines for repaying capital used for investing in future growth, or turning to equity finance solutions to have no burden of debt at all, interest-free finance can really help to accelerate growth.

How to get an interest-free business loan

You’ll first need to decide how much money you want to borrow and conduct research on the most suitable type of interest-free loan for your business. 

When applying for a loan, most lenders want to see your credit score and trading history, and other key information, such as financial statements, tax returns, legal documents and details about company ownership.

If using equity finance, you’ll need a compelling business plan, clear projections and market research to convince them about the viability of your venture and funding needs. 

If you’re looking for a merchant cash advance, providers often have a minimum trading history requirement, so look at MCA lender websites to see if you meet the criteria. 

Alternatively, search various sources for business grants to check your eligibility, which may depend on your sector, location or time in operation. You can look at HMRC’s Business Finance and Support page, Innovate UK, grant search apps like GrantFinder or local networking groups and posting. 

The pros and cons of interest-free business loans for SMEs

Main benefits of interest-free business loans

• No interest to pay: Get interest-free finance for your business means you’ll either make a fixed monthly repayment, pay a percentage of your sales or, in equity finance, pay nothing but give up shares or control in exchange for capital.
• Less pressure on monthly outgoings: Whether your repayments are based on sales (in revenue-based finance) or the capital is yours to use free of repayment pressure, you’ll experience fewer cash flow problems and conflicting liabilities each month (alongside tax bills, payroll and other regular expenses).
• Supports newer and underserved businesses: Interest-free loans from friends, family or people in your community, or government-backed schemes, can help start-ups and businesses with limited credit history to access crucial funds. Finance approval can be tricky when you’re just starting out.
• Lower total cost of borrowing: Not having to pay interest lowers your overall borrowing cost compared with many other loans and finance agreements, which helps with cash flow and growth.

Drawbacks of interest-free business loans to consider

• Availability and eligibility: While interest-free loans are attractive, they’re not as readily available to businesses. Plus, for other interest-free finance options, such as grants, you’ll need to meet a lot of specific eligibility requirements. 
• Risk of affecting relationships: If getting interest-free loans from friends or family or getting extended supplier credit, any issues with payments can impact your relationships and reputation. 
• Hidden or alternative cost: Many finance agreements that don’t include interest have other costs to consider, such as fixed funding/factor fees in revenue-based finance, penalties for late payments or future profits in equity finance options.

Is an interest-free loan right for your business?

Interest-free loans can be a great choice for businesses that need money fast. But it’s important to realise that they can be harder to come by and may not meet your scope of requirements, in terms of size of borrowing, term length or preferred repayment model.

Consider what type of lending solution best matches your needs. Some business owners like the structure of revenue-based repayments, others prefer more traditional loans, with regular monthly repayments, or equity finance may be a better fit for you.

If you’re after a loan that combines fast access to funds, sizeable loan amounts and flexible repayments, iwoca’s Flexi-loan could be the answer. Borrow between £1,000 and £1 million for a few days right up to 60 months and only pay interest on funds you draw down. Plus, we don’t charge for early repayments. Apply now and get a fund decision within 24 hours. 

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