Whilst every provider is different and will have its own unique guidelines, there are a few boxes that will need to be ticked no matter which provider you ultimately choose to go with.
Here are the main things you need to consider when applying for business loans:
Business loans are one of the most important forms of funding for almost every business on the planet.
Starting your own business and keeping it afloat is no easy task, especially when you aren’t flush with disposable cash to continuously fund the business in the long term and your business hasn’t yet hit its stride in terms of generating revenue.
So, what can you do to add additional financial security to your business without leaving yourself in a precarious position?
For many businesses, the answer is business loans.
A business loan is exactly what it says on the tin:
It’s a sum of money that’s issued to a business owner explicitly for use within their business. This sum is then repaid (plus interest) over an agreed period of time.
If you’re currently looking to inject your business with additional funding, business loans could be the boost that you’re searching for.
In this guide, we’ll give you all of the information that you need in order to make an informed decision on whether a business loan is right for you and your business – read on to learn more about business loans, repayment structures, and finding a loan that’s best suited to your needs!
Business loan eligibility criteria
Before you start to look at quotes and specific loan providers, you need to be able to answer the following question:
Are you eligible for a business loan?
If the answer is “no”, you’ll probably want to start looking at different forms of business finance. Cash flow and funding are massively important and business loans aren’t the only way to find additional cash for your business.
If you’d like to check out our top alternatives to business loans, take a look at the section titled Alternatives to Business Loans further on in this guide.
But how do you find out if you’re eligible for a business loan?
- Are you over 18 years old?
- Is your business based in the UK?
- Can you provide evidence that you’ll be able to repay the loan?
- Will your business pass a credit check?
- Will you pass a personal credit check, if necessary?
Once you’ve had a good think about all of these questions, you’ll have a good idea of whether you should continue your application for a business loan.
To proceed, you’ll need to start considering some of the finer details that may impact your eligibility to apply for a loan for your business.
These are factors that help to verify you as a borrower and give the lender more security and clarity before they offer you a sum of money.
Factors that you’ll need to consider include:
- Proof of a business bank account
- Performance history for your business
- Predictions for the sector that your business will sit within
- Evidence relating to the quality of your business assets
- A minimum monthly revenue amount to ensure that you can sustain repayments
- A comprehensive trading history for your business
- Verified proof of the business’s projected turnover for the next 12 month period
- Proof that you have not been declared bankrupt or handed a CCJ/Court Decree
In terms of proving that you meet the above criteria, you may want to ensure that you’re able to present the following documents if asked:
- Your business plan
- Business bank statements
- Accounts evidencing annual turnover and total debts
- VAT returns
- Proof of ID and address (for both the business and your personal residence)
- Details of all directors and shareholders
You’ve probably already noticed that this only relates to businesses that have been trading for some time. So how does the process change for brand-new businesses and start-ups?
For start-ups, the process of finding a business loan can be more difficult, but that doesn’t necessarily mean that it’s impossible.
Without evidence such as trading history and revenue streams, the risk for lenders is considerably higher – they’re entering the unknown and offering you money for your business without any guarantees or reassurance.
In these instances, Start Up Loans may be the most viable option.
These loans are designed specifically for new businesses and are government-backed. Provided by the British Business Bank, Start Up Loans are classed as a type of unsecured loan targeted at new businesses that are unable to obtain traditional business loans.
You’ll learn a little bit more about unsecured loans later on in this guide, but for now, all you need to know is that they’re a type of loan that doesn’t require you to put any assets up as security.
In general, the eligibility requirements for a government Start Up Loan are:
- You need to be a current UK resident with a business based in the UK
- You need to be over 18 years of age
- You need to be setting up a brand new business, or have a business that’s been trading for less than 36 months
- You must be running a business in a sector that’s eligible for the Start Up Loan scheme
- You need to be able to pass the lender’s credit checks and repayment affordability checks
Why do you need a loan?
Next up, you’ll want to focus on the reasons that you’re looking to take out a loan for your business, as there are only certain reasons that are valid and loans for other purposes may be rejected.
Business loans, as the name suggests, must be used for business purposes.
You can use your business loan to pay for almost anything relating to your business, but utilising the loan for personal reasons could lead to severe punishment.
You can utilise a business loan for…
Purchasing premises for the business
Every business needs a home, but purchasing an office, warehouse, or workspace can be incredibly costly for a business that’s in its early stages of operation.
To help you secure a location for your business, you can utilise your business loan to offset the costs, either using this sum of money as a deposit for a purchase or for setting the ball rolling on a rental/leasing agreement for the space.
Covering running costs
As a new business, covering your running costs is crucial.
You need to be able to pay your employees a competitive salary, ensure that suppliers are paid on time, and maintain a high level of service as you do so.
But this all comes at a cost. And as a new business, meeting these financial commitments isn’t always easy.
With a business loan, you’ll be able to ensure that you’re meeting all of your financial obligations on time and in full – this way, you’ll be able to start diverting your attention to growth and the future of your business, knowing that your current situation is secure.
Initial business setup expenses
From hiring the right people to investing in the best equipment and tools, there are lots of things that need to be in place before you can start generating any real revenue.
Business loans can help you to invest in your business and create a strong infrastructure for the future, giving you the foundations you need to build a business that’s primed for success.
Types of business loans
“Business loans” is a broad term that relates to any borrowing that’s used for business purposes. Still, many misinterpret this to mean that there is only one type of loan available to their business.
This is not the case.
There are lots of different business loan products available on the market, all of which offer different benefits that may be better suited to companies in different sectors or circumstances.
Here are the 9 most common types of loans available to businesses in the UK:
If you’re looking for a quick, effective injection of cash, short-term loans could be the ideal tool to utilise.
Short-term loans are exactly what you’d imagine – it’s a sum of money provided by a lender over a very short period. In many cases, this term can be as short as 1-2 months.
With short-term loans, you’ll pay the money back incredibly quickly, meaning you’ll be hit with less interest to pay, but you will need to ensure that you’re able to make a rapid turnaround on your repayments to avoid paying penalty fees.
Long-term loans are essentially an extended version of a short-term loan.
You’ll be borrowing a sum of money over a set period, but in these instances, you’ll be paying over a much longer timeframe. This timeframe can be anywhere from 3 years to 20 years, so you’re sure to be able to find a term that works for you.
With the repayments being spread over such a long period, you may find that you can afford to lend a more considerable sum for your business, but the downside to this is that you will be paying more interest as a result of the longer term.
One of the main subtle differences that you may notice between different loan products is variable vs fixed-rate.
Variable loans are loans with a variable interest rate – the rate of interest that you’ll pay on your repayments will fluctuate depending on the current market rate at that time, which could help you to pay back your loan sooner and with less interest if the market is favourable.
Of course, if the market hits tough times and interest rates soar, you may find that the interest you pay overall is more than you’d have paid with a fixed-rate loan.
In general, variable interest rate business loans do have a higher level of risk associated with them, but they can be a cost-effective option if you’re able to take your loan out at the right time economically.
Fixed-rate loans are the opposite of a variable rate loan – fixed-rate business loans have a set interest rate that does not change throughout your loan.
This means there are no surprises and it’s much easier to budget for your regular payments, which will be of the same amount for the duration of the loan.
Whilst there’s no option to repay a fixed-rate loan early in most cases, you may be able to find an early-repayment arrangement with your lender by contacting them and discussing the options.
In most cases, fixed-rate loans are the safest option for businesses looking to secure their finances and lower the risk associated with the loan.
Working capital loans
With a working capital loan, you’re able to secure additional funding for your business to ensure that you’re able to continue operating in times when circumstances change.
It’s a handy way to find the money to service large orders that your business may not have been ready to handle, but can also be a useful way to pivot your strategy and pour more resources into advertising and brand awareness.
With working capital loans, the key factor is considering the pros against the cons.
If your business productivity is suffering, you may well look to take out one of these loans to get back on track, but if there are other avenues to explore you may be better off investigating those further before committing to a short-term loan agreement.
Commercial mortgages are a type of business loan related to a company’s business premises.
This type of loan is best suited to businesses that are looking to borrow a sum of £25,000 or over – if you’re looking to borrow less, you may want to consider a different type of business financing.
Commercial mortgages can be used for many business development purposes, such as:
- Purchasing properties
- Developing properties
- Refurbishing and upgrading business premises
- Purchasing vehicles, machinery, and any other equipment that your business needs
Commercial mortgages are a very inviting proposition for most businesses looking to borrow a considerable amount. You’ll be able to choose flexible terms that suit your business, ranging from 1 year to 25 years depending on the lender that you choose.
You’ll also be able to select between variable and fixed-rate lending, making commercial loans some of the most interchangeable and personalisable on the market.
With equity finance, you’ll be raising money for your business by selling shares in the company – it’s a simple exchange that helps you to build capital without lending, but it does come at a significant cost in other ways.
When you sell shares to raise investments, you’re essentially losing ownership of part of the business, meaning you may not have full control over the business when making future decisions.
Instead, all investors will have a say – whilst the additional input from multiple parties can be incredibly valuable in some circumstances, it’s not for everyone, so be sure that you fully understand what you are giving up before selecting this method of finance.
Equity financing is usually a popular option for early-stage businesses that are looking to develop their products and technology without having to pay the development costs out of their own pockets.
In an asset financing agreement, businesses will use their balance sheet assets as collateral to borrow money against.
These assets don’t have to be physical assets like inventory – they can also be investment assets that have a financial value assigned to them.
When financing using assets, the amount that you can borrow will be influenced by the value of the assets that you currently own, with higher-value assets enabling you to borrow a more significant sum of money.
Asset financing can often be easier to secure than a traditional bank loan and the collateral value is easier to monitor and quantify, but you will be running the risk of losing your most important assets if you fail to repay your loan on time.
For most businesses, asset financing is a useful short-term lending option, but there are more effective ways to secure long-term investment and financing.
Invoice financing is a unique option that’s available to businesses with a number of outstanding invoices that are yet to be paid.
Unpaid invoices can be sold to third-party businesses for a percentage of their overall value. Whilst this does mean that you won’t receive the full invoice amount, you will be able to receive the money sooner. For this reason, invoice financing is usually only used by businesses in tough economic positions.
If your business is currently in a financial emergency and needs to secure money to assist with cash flow or to use as working capital, invoice financing could be a short-term solution to your problems.
However, invoice financing is not a sustainable solution for businesses looking to move out of debt and secure long-term growth – if this is what you’re looking to achieve, a business loan is a more suitable option for your business.
Business loan pros and cons compared
Business loan benefits
They’ll help you to continue growing your business
The biggest benefit that business loans offer is the complete convenience that they provide to companies in need of additional funds.
If you’re struggling for money or you’re looking to boost growth with additional cash, a business loan is one of the simplest and most effective ways to make that happen.
You’ll be able to retain full control over your company
Unlike with other forms of finance, you will not be required to release any equity in the business to secure a business loan.
This means that you’ll remain in full control of your business, without needing to add additional shareholders to secure further investment in the business.
There’s no external interference from the bank
If you’re able to stick to your repayment plan, there will be very little reason for the bank to interfere with your business after you’ve borrowed money using a business loan.
By offering you the loaned sum, the bank has agreed that you’re an eligible borrower and you meet their safeguarding criteria, so you can expect contact to be minimal.
Of course, if payments are missed or business plans change drastically, the bank may need to step in to ensure that the money is returned to them.
Business loan concerns
Eligibility criteria can be strict
Naturally, banks are cautious when it comes to giving away their money, particularly to businesses that have been unable to secure funding in other ways.
As a result of this, the eligibility criteria for a business loan can be quite strict and there will need to be a huge degree of transparency before you’re offered a loan agreement.
Businesses with a strong financial history and good credit records will have an easier time securing their requested loans, but if you’re a start-up/new business with no credit history or bad credit history, the process may be significantly more difficult.
You’re restricted in how you spend the money
When you take out a business loan, one of the main conditions that you’ll be asked to meet is that the money may only be spent on things deemed to be business expenses as per the lender’s guidelines.
Whilst most things that you’d look to utilise a business loan for will likely fall within this, there may be things that you are not permitted to spend your business loan on without violating the lending agreement.
For example, most lenders will not agree to a business loan if it is intended to cover recurring cash flow problems and using the money to do so will result in a penalty.
Secured loans put your assets are risk
By engaging in a secured loan agreement, you’ll be required to put your assets up as collateral.
As you can imagine, this does significantly increase the risk associated with your side of the deal – if you’re unable to make your repayments on a secured loan, you may be forced to give up some of your valuable assets, some of which may be fundamental to the operation of your business.
For this reason, it’s vital to ensure that you have a concrete repayment plan before entering a secured loan agreement.
Secured Business Loans
A secured business loan is a higher-value funding option that allows businesses to use an asset as ‘security’ against the amount borrowed. In this way, your assets act as collateral.
If your business finds itself in a position where the amount cannot be repaid, the lender is then able to recover any losses using the collateral.
The value of the secured loan can match up to 100% of the value of the collateral asset(s). However, the amount that your business can borrow is also impacted by its financial strength (profitability, credit history, existing debts, etc.).
How Do Secured Business Loans Work?
Secured business loans work in a similar way to personal loans.
Borrowers are charged a pre-agreed rate of interest by the lender. This is usually done on a monthly basis until the loan is repaid.
Most secured business loans come with a variable rate, meaning lenders should factor in the possibility of rate rises when calculating how much they can realistically borrow.
Variable rates also depend on the length of the borrow term as well as the value of the collateral put forward.
On top of collateral, it’s common for lenders to request a personal guarantee from the business’s director as an additional form of security.
Is a Secured Business Loan Worth Getting?
Secured business loans are a common funding option for businesses seeking an injection of funds. To help you decide whether this type of loan is right for you, let’s take a look at the pros and cons:
Advantages of Secured Business Loans
Because secured business loans reduce risk to lenders, their interest rates are often more affordable and their repayment durations can be longer.
Many secured business loans don’t require as much focus on credit history during the application process as the commercial asset is the main focus. This makes them a popular choice for businesses – SMEs especially.
Commercial assets for secured business loans include:
- Residential/commercial property
- Machinery and equipment
- Shares portfolio
Disadvantages of Secured Business Loans
The main downside of secured business loans comes if your business hits muddy water. If you end up missing payments, you will lose valuable assets.
Similarly, you’d need an asset to put forward in the first place. If your business doesn’t have suitable assets, you may have to consider a different type of business funding.
Accessing funds from a secured loan will often take longer when compared to other loans.
Lenders have to complete more due diligence on the various elements of a secured business loan like property valuations and legal requirements.
Secured business loans are typically larger loans made with a collateral attached as an added layer of security for lenders. If payments are not maintained, the business risks losing the attached assets.
Secured business loans require less insight into the borrower’s credit history due to the main focus of the loan centering on the collateral.
Unsecured Business Loans
If you’re a business in need of funding but are short on assets, unsecured business loans may be a suitable option.
Unlike secured business loans, they don’t require an asset to use as collateral and can act as a quick funding option.
Unsecured business loans are available from a wide range of lenders. If you have a good credit history, obtaining this type of loan is relatively straightforward.
Examples of unsecured loans include cash flow loans and working capital loans.
For SMEs, unsecured business loans are used to cover the lower revenue of slower trading periods against the higher predicted revenue made in future periods.
Advantages of Unsecured Business Loans
As unsecured business loans offer different solutions to borrowers, they provide unique benefits.
Unsecured business loans are relatively quick to obtain compared to secured business loans because they don’t require the legal process of approving assets.
If you have assets that you don’t want to offer up for the sake of acquiring a loan, this type of loan is ideal. This frees up the assets to be used elsewhere.
They’re also cheaper upfront than secured business loans because they don’t include the cost of valuing assets
Similarly, there are a wide range of unsecured business loans available, all designed for different types of business.
Disadvantages of Unsecured Business Loans
Many of the pitfalls surrounding unsecured business loans come from their inherent risk (to the lender) of not requiring collateral from the borrower. Because the borrower does not need to leverage their assets here, the amount of funding you can apply for is often lower than what you could get with a secured loan.
Unsecured business loans also attract higher interest rates. Again, because the absence of collateral means an added risk to the lender, this higher fee has to be expected.
There are also difficulties when applying for unsecured business loans. If you don’t have a good credit score, you’re likely to have your unsecured business loan rejected due to the lender not seeing much security in the borrower.
If your credit score is closer to ‘average’, you may still qualify for an unsecured business loan but it may come with higher interest rates.
Unsecured business loans are typically lower-value business loans that don’t require collateral. They are a simple solution for businesses that need a quick cash injection and have a good credit history.
However, due to the riskier nature of them not requiring collateral, a business with a less than ‘good’ credit score will find them difficult to obtain without high interest rates.
How Can I Use My Business Loan?
Business owners take out business loans for a variety of reasons. Apart from not being able to spend your loan outside of business purposes, there are no limits to what a business loan can be used on.
Typically, business loans are spent on things like:
- Staffing costs – Whilst many aspects of a business’s day to day can change, what remains is the need to pay staff. On top of salaries, staffing costs can also include training and any ongoing hiring costs.
- Clearing debt – It may seem contradictory to pay debt off with more debt, but not every debt is created equal. If you’re close to paying off a particularly high interest loan, it may benefit you to pay it off with a different, less demanding one (for example, clearing a debt that is draining you with high interest rates with one that has fewer fees).
- Covering ongoing costs – Cash flow can ebb and flow depending on demand for your product or service throughout the year.
- Financing a business start up Strong sales aren’t guaranteed when first starting out in business. A loan can help keep you afloat whilst you get your business on its feet.
- Buying or maintaining inventory and equipment Breaks and malfunctions happen, and often at great cost or inconvenience to the business relying on their operation. In these cases, business loans can help cover the costs – be it for replacement or repair.
- Expanding operations – If you’re ready to expand and are confident in your business’ future, a loan may be a savvy choice to allow you to secure new premises and cover increasing costs.
How Long Does a Business Loan Last?
If you’re applying for a business loan, you probably want to know how long the repayment period is.
Long-term business loans give businesses a long time to repay their debt – sometimes decades – and with more accessible terms for borrowers.
Long-term business loans can also be paid over a more flexible period of time compared to short-term loans. You can even take a ‘repayment holiday’ – a grace period where payments don’t have to be paid – as long as you:
- Have made at least one repayment and have a Direct Debit in place
- Are up-to-date with loan repayments
- Are not in the process of making a loan protection insurance claim
- Have 30 days or more remaining on your loan term
Short-term loans may require regular repayments much sooner.
So how long are business loans?
Anywhere between three months to two decades depending on whether it is long or short term, on top of a variety of other factors, including:
- Lenders’ terms and guidelines
- Who is providing the loan
- Intended use of loan
How to Choose the Right Business Loan for You
There are plenty of things to consider when taking out a business loan.
Luckily, UK businesses have a wide range of providers offering slightly different options. So, if your business is looking to borrow funds, here are some questions you must consider.
How long has your business been trading?
Lenders like to see a minimum of 1-2 years of business history before considering loans – but you still have options if you’re a younger company. Government grants and start-up loans are a great alternative to business loans in this case.
What is your annual turnover? And, how about your profit margins?
As the north star of a company’s financial health, lenders will need details of your annual turnover and margins to understand how much money you bring in.
Lenders also look at a company’s monthly turnover in comparison to how much they’re asking to borrow because you usually can’t borrow more than what you make in a month.
What is your credit history?
We’re talking both business and personal. How reliable are you personally and as a company? Will any red flags pop up? A lender will need assurance that you can pay back what you owe.
How Much Will a Business Loan Cost?
Figuring out the full cost of your business loan means considering a number of factors. The amount of the loan itself, being the obvious one, but also any fees or charges that the loan could rack up too.
Loans of all kinds come with interest (the charge incurred by the lender to the borrower). Interest isn’t usually a fixed number added onto the loan amount. Instead, it is usually expressed as a percentage and is based on factors like:
- The type of loan being made
- The creditworthiness of the borrower
- The length of the loan
- The riskiness of the loan
What Are the Best Interest Rates on Business Loans?
Finding the best business loan interest rate will depend on the sort of business you run and the kind of loan you’re looking for.
During your business loan application, you should always get a thorough overview of interest rates. This means consulting with as many potential lenders as possible to see what your options are.
In general, interest rates vary depending on the lender:
- Traditional banks – 2% to 13%
- Online lenders – 7% to 100%
- Invoice financing – 13% to 60%
It’s important not to just focus on these specific numbers, however. Headline interest rates don’t cover any additional fees so make sure you review the lender costs in full before giving your signature..
Now that we know what different lenders will charge on interest, what about the interest rates on the different loans themselves?
Let’s start with the business loans we already know: Secured and Unsecured.
We know that secured loans come with collateral, which makes them a less risky prospect for lenders. This lowered risk means the lender can also afford a lower interest rate.
The annual percentage rate (APR) of a secured business loan is anywhere between 2% and 7%.
Due to having no collateral, lenders will place higher interest on unsecured loans as they are deemed more risky. For the borrower, these higher interest rates should be a main consideration when taking out an unsecured loan.
The APR for unsecured loans is around 3% to 10%.
There are other business loans that go beyond secured and unsecured, so let’s take a look at some of them and their respective interest rates.
Merchant Cash Advance
Also known as a business cash advance, this is a flexible financing option for businesses that receive a healthy number of transactions by card. It allows you to borrow funds ‘secured’ against future card payments, which are then repaid as a percentage of future card revenue.
A Merchant Cash Advance is quick and relatively easy to arrange. This funding option can help SMEs with their cash flow, especially in the retail and leisure sectors.
In the world of ‘alternative finance’, merchant cash advances are seen as one of the most innovative products in recent times.
They also work slightly differently to other forms of interest in that they are one of the few methods in which repayments are made at a ‘factor rate’ rather than an interest rate.
Factor rates represent the cost of your funding and are applied only to the original amount borrowed. They work on a decimal scale rather than a percentage.
Most factor rates fall between 1.1 and 1.5.
So if your factor is agreed as 1.2, you’re expected to owe back 120% of the amount borrowed via a cut of the card payments made in that time.
Invoice finance involves the lender using an unpaid invoice as security collateral for funding. This is done by allowing quick access to a percentage of that invoice’s value, sometimes within 24 hours.
When it comes to the repaying on invoice finance, it also doesn’t follow the same interest rate as usual loans do. The lender instead takes an extra percentage (1-5%) off the invoice as a fee.
How Can I Trust My Lender?
One of the biggest reasons why business owners avoid taking out loans is from lack of trust. Borrowing money can be difficult, so it’s important to know that you are dealing with a lender who isn’t simply trying to take advantage of you.
Whilst people are becoming more aware of the presence of scammers, there is still a significant presence of organised financial criminals in the UK and beyond.
Key fact: In 2020 alone, billions were lost to fraudsters who took advantage of the poorly protected ‘bounceback loan’ that the government offered to stop small businesses from shuttering.
Whilst this is a concern, it’s worth noting that the lenders ranging from big banks to specialised funders all operate in a highly regulated industry. Here are some important considerations to help you decide the trustworthiness of your lender:
The best way to figure out the trustworthiness of any company or product is to see/hear what other people have to say about them from their own experience.
The internet has made the review game an open book for pretty much everyone. If lots of people have good things to say about a lender, this is obviously encouraging.
Another rule of thumb: the longer a lender has been around, the greater chance it can be trusted to lend money.
How does your lender speak to you?
Do they use nonsensical jargon that would only make sense to an accountant?
If you feel like your lender is not making the terms of your loan clear or accessible, take pause. Loans exist to be paid back so, in this scenario, if the process is made all the more confusing by the lender’s lack of clarity, the arrangement is risky.
Choosing a loan provider that is transparent in communicating, as well as one that delivers good customer service, is key when considering a business loan.
Transparent About Cost
Similarly, all lenders are required to disclose a loan’s annual percentage rate (APR). If crucial details like these are mentioned from the outset, you know that the lender is responsible.
A good lender will break down any additional fees and charges so you know in black and white what the loan will cost over a certain period.
Recognised by Credit Bureaus
A trustworthy lender is one that is recognised by credit bureaus. Credit bureaus are made aware of the consistency of your repayments and change your credit score accordingly.
All reputable lenders will ask for crucial financial information about your business before landing on a loan amount. This ensures that they offer an amount that lenders can not only afford but is also enough that they aren’t forced to take another loan out.
On top of this, their interest rates shouldn’t be notably excessive. Most countries have laws that cap interest rates on loans so they are unable to exploit vulnerable customers. Because of this, all reputable loaning bodies should provide loans at recommended rates.
At the same time, trusted lenders should have flexible terms of engagement, which should be negotiable and accommodative in the instance of you not being able to make a repayment. No unreasonable penalties should be made in the case of repayment delay.
Additionally, here are some blatant warning signs that you’re dealing with a fraudster:
- Asking for upfront payment on your business loan
- Guaranteeing business loan approval
- Unverifiable licence
- Putting pressure on you to quickly accept the terms of your business loan
- Offices not findable online
- Unsolicited correspondence regarding borrowing
How to Apply for a Business Loan
Now that you know the types of loans that exist and their repayment terms, as well as the characteristics of good lenders, it’s time for you to actually apply for a business loan.
Like many important things to do with your business, applying for a business loan takes time no matter what loan you’re taking out. So, before you go ahead and apply, there are a few considerations to make in order for things to go as smoothly as possible later down the line.
Step 1: Calculate Your Loan Amount
It sounds obvious but it’s important to know what exactly the loan is for so you can figure out how much extra funding you need. We’ve gone through some of the reasons as to why you might want to take out a business loan, but the main reasons are to do with business expenses, refinancing, and expansion.
Are you a home-based establishment looking to expand and open a physical store? When considering your loan amount, think about any and all relevant costs including:
- Utility/maintenance costs
- Additional equipment and resources
- Any commercial real estate and licensing costs
When deciding the appropriate figure, it helps to think of all the possible costs that don’t initially show up on your radar. You don’t want to agree to one amount just to stop short because of an unexpected cost that you can’t avoid.
Step 2: Create a Business Plan
Private lenders will tend not to process a loan application without a business plan accompanying it. A business plan tells the lender that there is a road map laid out. This, paired with your expense sheet and financial projections for the next five years, will help you determine how much funding you need and will give the lender more confidence in your capabilities of paying the loan back.
Without a plan, you may still be approved for a business loan, but it may also come with higher interest rates to account for the lack of commercial viability that you’re offering.
When considering the reality of your repayment alongside your business plan, ask yourself these important questions:
What are the repayment terms?
How much can you pay off every month?
Will you experience seasonal dips in revenue?
Can you account for supply chain interruptions?
Step 3: Consult a Financial Advisor
If you’re still not entirely sure about the whys and wherefores of your business loan but still think it may be a viable option, get a second opinion from a financial consultant of some kind.
With their professional expertise and external perspective, an advisor can offer advice and avenues of thought that you may not have considered and are unique to your situation. They can also assist you with creating a business plan if needed – this will be helpful in showing you exactly how to remain profitable whilst keeping on top of repayments.
Step 4: Choose Your Lender
You should now be in a position where you can approach a lender of your choosing. But which lender to go for? Luckily, there are several kinds of lenders for different borrowers.
As already discussed, there are also different kinds of loans so make sure you take that into consideration too. Will it be secured or unsecured? A merchant cash advance or invoice finance? Have these answers ready for when you approach your lender.
When you finally do make the move, it’s also important to note that not everyone is approved for their business loans. In fact, between big banks and alternative lenders, approval rates sit at about 1 in 5.
But, don’t fret – this isn’t necessarily bad news. As we said, legitimate lenders simply won’t approve a loan if they don’t think you qualify. That means that no one is getting through the cracks, and if you have thought it all through and are confident in your ability to pay it off, you won’t be part of that 4 in 5 anyway.
There are a few types of lenders that your business can use:
- Banks: Both on the high street and online, banks handle much of the money that is processed through personal and business accounts.
- Credit unions: Not-for-profit organisations offer similar loan services to banks, except with lower interest rates/fees.
- Alternative finance providers: Any non-bank options provide funding to SMEs via loans, finance, and equity purchases. We’ll get more into alternative lenders below.
Step 5: Supply the Lender with the Relevant Documents
Once you’ve got your lender of choice, you have to provide the appropriate literature that will verify the essential financial details of your company. These documents will be essential to your loan being approved so it’s important that you come prepared.
Business Bank Statements: Verify your company’s income and outgoings via a summary of your transactions throughout the month.
Financial Accounts: Offer clearer, longer-term insights into a company’s financial year in a way that monthly business bank statements don’t. They include:
- Turnover and profitability
- Equities attached to your business
Financial accounts also include a Company Registration Number (CRN) and the registered address of your business.
Management Accounts: Used to display an updated impression of how a business is performing. Helps lenders determine what will be on the next set of accounts via profitability and losses.
VAT Returns: Usually updated every three months and can be used as an alternative if your financial accounts are out of date. If your business is VAT exempt, however, this will not be an option for you.
Financier and Director Details: Any company directors, shareholders or other financiers will need to submit their details.
Proof of ID and address: Used to avoid fraudulent activity and money laundering as well as to authenticate who you are. ID can be provided in the form of a driving licence or passport, whereas proof of address is in the form of utility bill or personal bank account statement.
Step 6: Wait for Loan to Be Processed
At this point, you’ve done everything you can do and it’s in the hands of the lender. Once you’ve sent over all the relevant documentation, it’s just a matter of waiting for your loan request to be processed and approved.
But, how long does a business loan take to get approved?
Well, of course, this all depends.
Many things come into play when deciding the duration of a business loan being approved. This includes the type of lender, the type of loan, and the financial health of your business.
It may even come down to the lender’s workload. If you apply during a particularly busy period, this may slow down the time it takes them to get round to your application.
Traditional lenders like banks sometimes take a little longer to approve business loans than the smaller private lenders. And, as we’ve already discussed, if you’ve applied for a secured business loan, the legal due diligence associated with checking the worth of the assets tends to slow down the process.
For the average unsecured business loan, this can take up to anywhere between a matter of hours to several weeks.
What If I Need a Business Loan Sooner?
We noted how smaller private lenders can be a little more prompt than banks in processing business loans. They work on the assumption that small businesses need finance sooner rather than later and so can provide some quicker options.
They have options to pre-approve your business loan in very little time and can offer you access to the finance within a matter of days.
Key tip: Take the time to do all the appropriate research about your loan and potential lender before trying to access quick finance, especially because the quicker finance options usually come with higher interest.
So, which business loans are quick to access?
- Merchant cash advance – Can often be arranged within 24 hours of application or once the lender is linked to your business bank account.
- ‘Buy now, pay later’ finance – Quick to arrange and allows money from your customers quickly.
- Invoice finance – Can speedily release cash tied up in unpaid invoices.
- Unsecured loan – Quicker to process as no collateral to be assessed.
What Are the Alternatives to Business Loans?
Maybe since you landed on this page you’ve realised that, although you do need access to extra funding for your business, maybe a loan isn’t exactly it.
If that’s the case, you’re in luck because there are also plenty of alternative options available.
Business Credit Cards
A business credit card works in the same way as your personal credit card. You can purchase goods and services using it and pay it off at a later date. Business credit cards are unique in that they offer businesses a number of business-related benefits:
- Periods of interest-free credit on purchases
- Annual fees waived once a minimum spend is reached
- Access to online tools to help with spending and reports
- Points, cashback, and sign-up bonuses
- Discounts on shipping, travel and supplies
- Rewards on advertising purchase
- Purchase protection
These kinds of benefits are usually specific to different companies and act more as incentives for signing up with certain lenders over their competitors. There are more general benefits to owning a business credit card too, like:
- Establishing a business credit history: Many SMEs and start-ups are turned down for loans due to their lack of credit history. A business credit card can help build up this initial credit score so they are more eligible for finance later down the line.
- Organise company spending: Instead of outgoings leaving multiple accounts, every purchase and expense can come out of the business credit card so it is more easily tracked.
- Higher credit limit: You can usually borrow more with a business credit card compared to your personal credit card as it takes into account business income. The typical personal credit card limit in the UK sits around £3,000-£5,000 whereas business credit limits can be upwards of £250,000-£500,000.
As with anything, though, there are some risks and downsides to consider when taking out a business credit card.
Disadvantages of Business Credit Cards
- Another form of debt: For all the good that can come out of taking out a business loan, debt becomes harder to manage the more you accumulate.
If you already have a personal credit card, for example, it may become more difficult to manage alongside a business credit card. This may lead to missed payments and interest stacking up.
- Risk of damaging credit score: Similarly, late or missed payments can have a negative knock-on effect on your credit score, which may make borrowing harder and more expensive in the future.
- Annual Fees: Business credit cards tend to come with an annual fee to use, so they are only worth taking out if that annual fee can be justified. Annual fee prices typically range between £30-£200.
- No Section 75 Protection: Section 75 of the Consumer Credit Act refers to the legal obligation for credit card companies to cover the cost of purchases of over £100 that have gone wrong (e.g. faulty/broken items). However, this is unavailable on business credit cards.
Business credit cards are an alternative to business loans in that they provide extra funding when you need it. They are similar to personal credit cards but with higher credit limits and certain benefits depending on which one you choose.
However, their annual fees and lack of protection under Section 75 of the Consumer Credit Act may make them unsuitable for some business owners.
Business overdrafts are another alternative to business loans.
These are a line of credit on your business bank account that give you extra short-term cash flow than your business has access to from its own capital. This is different to a business loan in that interest is paid annually on the amount taken out as opposed to fixed monthly repayments with interest.
Your bank may also charge a fee on your overdraft, including:
- Arrangement fee – For setting up the overdraft.
- Unarranged overdraft fee – For if the user goes over their limit.
- Change fee – For changing the amount of the overdraft.
- Renewal fee – For choosing to renew the overdraft (this is an annual fee).
The interest rate of your business overdraft will vary depending on the bank you’re using, and it can also change at any time so overdrafts are best used for the short term.
You’re usually able to pay a business overdraft back when your cash flow allows. Business overdraft limits can also be reduced and increased based on your needs and whether the bank agrees to it.
Advantages of Business Overdrafts
Business overdrafts are often quicker to arrange because the process is very straightforward. This means that business overdrafts have high approval rates, and their relative flexibility also means you can pay back what you owe when you have the available funds.
Disadvantages of Business Overdrafts
The varying fees required just to have the overdraft open can be enough to put business owners off.
On top of this, overdrafts are repayable “on demand”. This means that the lender can demand repayment of the entire amount at any time, which can be very disruptive for businesses who require an overdraft in the first place.
Business overdrafts are simple lines of credit that you can take out from your business bank account. Unlike business loans, overdrafts accrue interest based on the amount taken out, and they often have a variety of fees attached to them.
The flexibility of business overdrafts makes them quick and easy lines of funding for business owners, but their fees can be off-putting on top of the fact that they can be closed by the lender in a moment’s notice if they think you’re overusing it, leaving the borrower without additional funding and debt that must be paid off sooner than they wanted.
Business grants are payments provided by either a private organisation or the Government for a specific purpose. The major way in which they differ from other forms of finance is that they are non-repayable and are used as more of an incentive to innovate and explore certain aspects within your sector or realm of work.
Business grants can vary widely between sectors and can help fund anything from implementing energy-efficient measures in workspaces to repairing and conserving historic buildings. They are either paid in an upfront lump sum or as a reimbursement afterwards.
Business grants are fairly strict with their eligibility criteria, though, and qualifying can often come down to small things like where your business is based, the type of business you run, and whether there is an area of focus that you could help with.
The application process from business grants can also be quite time consuming so, if you’re looking for quick cash, a grant may not be the best option.
If you still think you could benefit from a business grant, you’ve got plenty of options to shop around:
- Innovation Grants: Supports innovative ideas and business growth.
- The National Lottery Heritage Fund: Sustains and transforms UK heritage by investing in museums, park, and places of historic and cultural importance.
- R&D Tax Credits: Government cash payments to encourage research and development projects that relate to science and tech.
- Local Enterprise Partnerships: Voluntary partnerships between local authorities and businesses that provide funding and support in local areas.
- New Enterprise Allowance: Supports those on income support looking to start a new business.
- The Prince’s Trust: Supports young people between 18-30 in starting and running their own business through funding, resources, training, and mentoring.
The Snowball Effect of Business Grants
An obvious advantage of business grants is that they are basically free money for your business. Unlike loans, which are paid back with interest, grants require no repayment, which makes them very alluring for business owners everywhere.
One other aspect of business grants that people don’t often mention is the snowball effect of being awarded one. Once you’ve received one grant, your chances of receiving them in the future increases, too, as you’ve already been seen as a good candidate for free funding.
This, in turn, will increase your credibility and visibility within awarding bodies and beyond. If you eventually go on to win some of the most renowned grants, the exposure and goodwill that come from this association could be worth more in the long term than the funding itself.
Disadvantages of Business Grants
We’ve mentioned how business grants aren’t a short-term solution to finding funding. Due to the amount of research and stacks of paperwork involved in the application, the road to having yours approved can be relatively slow.
There are all kinds of grants to apply for, so figuring out which exact grant suits your venture the most will take some research. You could also waste a lot of time in choosing a grant just for it to be rejected because you applied for the wrong one.
Difficult to Qualify For
If you do choose the correct grant, you’ve also got to be creative and persuasive with your proposal. You’re likely amongst hundreds of other businesses in your situation, so you won’t receive funding if you aren’t able to convince the awarding bodies that you deserve it most.
A particularly frustrating pitfall of business grants is that they aren’t always renewed. This means that, although the grant period is agreed upon in advance, one month you’d be receiving the grant funding as usual and the next you’d receive nothing. Some business grants require manual renewing after a certain amount of time.
If this is the case, you must make sure that your business can run of its own accord financially if the grant can’t be renewed.
Grant funding also comes with significant restrictions on what you can spend it on. As part of your application, you must state what exactly it is you want to put the money towards. If you win the grant, make sure you stick with that proposal.
Business grants are free payments made by governments and private companies to incentivise innovation and exploration within certain fields of work.
They are non-repayable and can drum up good repute for your business. However, they are difficult and resource-heavy to apply for and are restrictive in what you can spend them on.
Crowdfunding is another alternative to business funding.
The crowdfunding model throws the doors of investment open to the general public. It gives a larger pool of people – beyond venture capitalists – the opportunity to make affordable ‘micro-investments’ in businesses or products that interest them.
Crowdfunding has gained major traction since the days of social media – the prevalence of which has allowed anyone to share their crowdfunding projects with their friends and followers easily.
When it comes to crowdfunding, there are several types to consider:
This type of crowdfunding involves people donating money for something in the hopes of its future success. Unlike most financial investments, this type of crowdfunding is done with nothing expected in return.
With this type of crowdfunding, the business offers a benefit to those who make a pledge, be it early access or some kind of exclusive bonus.
Also known as peer-to-peer lending, this is closest to the traditional loan that a business would apply for (in that investors receive their money back with interest).
Instead of their money back in return for their financial input, investors receive shares in the business. This is also known as seed capital.
Crowdfunding is a unique way of raising funds for your company. With it comes an equally unique set of pros and cons that you should consider before seeking it out as a funding option for your business.
Let’s take a look:
Advantages of Crowdfunding
- Cut out the middle man – With crowdfunding, you don’t have to go through banks, credit unions, or building societies to get your funding approved because you’re raising funds from the exact people who are in some way interested in your business. These people also often become very loyal customers due to their financial contribution to the business.
- Flexible and cheaper – Depending on the type of crowdfunding you go for, you may find that it is a less rigid process for you as a fundraiser than traditional methods allow. It may also prove to have significantly fewer costs to you in the long term.
- Free marketing – By speaking directly to the people who are interested in the prospect of your business, you actively promote it during rounds of crowdfunding. This can snowball into media and PR coverage if you drum up enough interest. Similarly, you can receive real-time feedback from investors.
- Debt-free way of raising funds – Unlike taking out a loan, crowdfunding allows you to raise money without financial risk on your part. The money raised also goes solely on growing your business as opposed to paying off debt.
Disadvantages of Crowdfunding
- Resource heavy – Creating a successful campaign that drums up enough interest with a suitable amount of people takes time, effort, and money. This may not be ideal if you need funding sooner.
- All or nothing – If you fail to meet your financial target during certain crowdfunding campaigns, any investments put into your campaign are returned and you end up with no investment.
- Negative marketing – Whilst a successful campaign can create a good positive buzz around your product, an unsuccessful one will do the opposite, potentially harming your business’s reputation long term.
- Loss of control – With certain types of crowdfunding, some investors may want a stake in the business in return for their investment, which may result in you losing some control of your business’s future.
- Ideas can be stolen – Being exposed to the general public puts you at risk of bad actors potentially stealing your business ideas for themselves.
Crowdfunding is an alternative method of raising funds for your business. It involves interested members of the general public makingmicro-investments into your business or project. There are different types of crowdfunding and ways in which investors can gain from their investments.
Because you aren’t working with a bank to secure a loan, crowdfunding can be flexible and cheaper to do as well as provide free marketing for your business. Of note, however, it can be a resource-heavy fundraising method and could lead to bad press if you fail.
Much like in equity financing, an angel investor (also known as a ‘seed investor’) puts their own money into a small business in exchange for a minority stake in it. These investors are usually high net worth, experienced business people or entrepreneurs who know a lot about the business world.
Because of this insight, angel investors can also offer hands-on mentoring and support on top of any financial investment, as well as the benefit of the investor’s time, skills, and network.
Where Do Angel Investors Put Their Money?
Angel investors usually invest in businesses that are at an early, pre-revenue or pre-profit stage. They are sector-agnostic but prefer companies with a business proposition that shows scale. They typically provide between £15,000 and £500,000 worth of investment, but some are known to offer upwards of £2m.
This investment usually spans over a matter of years and can be obtained within months if you have the correct network and all your financial ducks in a row for the pitch.
A Personal and Financial Investment
Their investment is much more than financial and they spend lots of time with their business to help push it forward. This usually forms very strong relationships between the business and investor.
Though some work alone, angel investors quite often invest as a syndicate to pool their collective money and insight together. Within this syndicate is usually the ‘lead angel’ who coordinates the whole deal. This is the person who will have the most contact with the business and can even act as an advisor or non-executive director.
Because this type of investment is about the partnership between the entrepreneur and the investor(s) as much as it is financial, angel investors primarily look to the entrepreneur more than the business itself.
When considering a deal, they must consider whether they will get on with a potential partner for the next X amount of years and if their guidance will be taken onboard. They must also figure out if a potential partner seems passionate and honest about their business and if they have the understanding and evidence needed to prove their worth.
Advantages of Angel Investors
The main benefit of working with an angel investor comes from the expertise and sector-related advice that they can provide the business that the business owner may not otherwise have.
Their involvement also provides great credibility to your business should it undergo a later round of investment from other interested parties. Due to their stake in the company only being a minority 10-25%, it also leaves the business owner in firm control of their venture.
Disadvantages of Angel Investors
Whilst there are resources for SMEs to seek out potential angel investors, a business’s best chance of acquiring one comes from having an existing relationship with an investor. Convincing investors with whom you have no personal connection can be hard work.
Due to its less formal nature, negotiating terms for an angel investment can also lead to a lot of back and forth from both sides trying to get the best deal for themselves. This can slow down or complicate the investment process for everyone.
Like with many investments, angel investors are also looking for rapid growth so they get a good return. Therefore, they expect to see results within three to five years and may even pressure you to grow more than you initially planned or wanted.
Angel investors are (often groups of) wealthy individuals looking to invest their personal wealth and business insight into startups. The investment is as much about mentoring the business owner as it is providing them with financial support.
This investment of mentorship, as well as funds, can lead to advanced credibility if the business undergoes further investment down the line – however, it can be muddied by informal agreements and growth expectations that don’t gel well with the business owner.
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