What is a green loan? A plain guide for UK business owners

"Green loan" is used for products that have little in common. A bank may use it for a mortgage top-up for a house, a lender may use it for a business loan, and the finance industry has a formal meaning that matches neither. This guide answers the question owners type into a search box, then explains what the definition means in practice if you are running a small business that wants to fund something like solar.

The formal definition

The Green Loan Principles, published jointly by the Loan Market Association and its sister bodies, define green loans as any type of loan instrument where the proceeds, or an equivalent amount, are exclusively applied to finance, refinance or guarantee eligible green projects, aligned to four core components. These are the use of proceeds, the process for project evaluation and selection, the management of proceeds, and reporting. The current version is dated 26 March 2025. The Principles are voluntary recommended guidelines, which means a lender does not have to follow them to call something a green loan.

What counts as a green project

The listed categories include renewable energy (production, storage systems, transmission, appliances and products), energy efficiency and clean transportation, including infrastructure for clean energy vehicles. A rooftop array, a battery and a vehicle charger can all sit inside these categories. The British Business Bank says that green loans to smaller businesses are typically restricted to funding sustainable business activities such as investment in renewable energy, green buildings and pollution prevention.

Green loan or sustainability-linked loan?

A sustainability-linked loan is a different product. Its use of proceeds is not what defines it, and in most instances it is used for general corporate purposes. Its price changes with achievement of pre-determined sustainability targets, and the most common feature is a margin that is reduced when a target is met and raised when it is missed. If a lender offers you a sustainability-linked loan, you are agreeing to hit targets, not simply to spend the money on something green.

Is a green loan a good idea for a small business?

It depends on what you compare it with. A green loan is not automatically cheaper. The label describes the use of the money, and the rate depends on the lender, the term and any security. Some lenders and public bodies do discount; the Development Bank of Wales Green Business Loan Scheme, for instance, offers discounted fixed rates in Wales to firms trading for at least two years. Others charge their normal rate. The sensible test is the same as for any borrowing: total repayable, security and whether the saving covers the repayments. Our solar loans for small business page walks through that cash-flow test with worked numbers.

Where this leaves a business owner

Treat "green" as a description of what the loan is for, then compare it on price and terms. The full guide to a green loan for small business covers who lends, the Growth Guarantee Scheme, personal guarantees and the tax treatment. If you are weighing a green loan against an ordinary business loan for solar, our green loan vs business loan guide compares them directly.

Questions business owners ask

What is a green loan?

A loan where the proceeds, or an equivalent amount, are exclusively applied to finance, refinance or guarantee eligible green projects, aligned to the Green Loan Principles' four core components.

Is a green loan cheaper than a normal loan?

Not automatically. The definition is about use of proceeds, not price. Some schemes discount, such as the Development Bank of Wales scheme; others do not.

What is the difference between a green loan and a sustainability-linked loan?

A green loan restricts how the money is used. A sustainability-linked loan is usually for general purposes, and its margin changes if sustainability targets are hit or missed.