Soft business loans: what are they, and how can you get one?

If you've heard the term ‘soft loan’ but aren't sure what it means, keep reading as we explore what it is, how they work and how to get one.

What is a soft loan in business?

Also known as ‘soft financing,’ a soft business loan has little to no interest rate and extended repayment terms. Governments from developed countries traditionally offer these loans to underdeveloped countries to help improve infrastructure and enhance growth opportunities.

The term ‘soft loan’ can also describe other low-interest or low-risk loans, such as those from family and friends. Government loan programs like the startup loan scheme and growth guarantee scheme can also be classified as soft loans, as their repayment terms are much more flexible and favourable than those of high-street banks, with lower interest rates, too.

Am I eligible for a soft loan?

For soft loans that are government-backed, not every business is eligible for support. For example, the startup loan scheme, although not a ‘soft loan’ in the traditional sense, is a personal loan for business purposes, allowing companies to apply for up to £25,000 if they:

• Have a business that has been trading for less than three years
• Are over the age of 18
• Are a UK resident
• Can pass a credit check

Alongside access to free business mentorship and advice for one year, these loans come with fixed low interest rates to help businesses grow quickly.

Low interest rate business finance options

Taking out finance can be an expensive way to grow your business because you’re not just repaying the loan amount; you’re paying interest on those funds, too. Soft loans provide low or no-interest options to help you grow your business without the additional financial burden.

Here are some low-interest soft loan options to consider:

Personal savings

The best way to access business funding on your terms is to use your personal savings as a small business soft loan. You don’t have to answer to anyone; you can spend your money however you like in your business. Personal funds are likely limited, so if you’re looking for substantial investment, you might have to look elsewhere.

Family and friends' loan

Another great soft loan alternative is to borrow money from friends and family. This money is usually quick to access and you might even be able to swing a no-interest loan. Make sure you draw up a loan agreement so everyone is clear on expectations from loan repayments to how you’ll use the loan in your business.

Equity finance

If you’re looking to seek external finance for your business, you can consider equity finance. Although the caveat is giving away equity shares in your business, you can usually access large amounts of funding from angel investors without the need to repay. Angel investors are traditionally very wealthy entrepreneurs with vast business experience. So you can secure finance and business advice from one person.

Whether you’re insistent on sourcing a soft loan or are willing to obtain a loan with interest, there are plenty of internal and external sources of finance available. Ensure you research how to choose the right business loan for your specific business needs before jumping into a decision.

You can use our free loan comparison tool to compare low-interest/soft loans or other finance options. Our tool is self-serve, so you can search and compare finance at your own pace, with no obligation to proceed with any finance quote offered. Compare business finance.