A Guide To Getting a Small Business Loan

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Navigate the path to success with our guide on getting a small business loan. Discover tips, options, and steps to secure the financing you need.

A Guide To Getting a Small Business Loan

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In a rapidly-changing business world, having the flexibility to be able to grow your company has never been more important. The key to growth is usually financial. Investing sensibly can turbo-charge your business, and if you don’t have the available funds to be able to do so, small business loans might well be the answer.

Understanding Small Business Loans

Business loans are loans that you can take out to help your business grow, buy new equipment or cover periods of uneven income. There was a time when the only place you could get such a loan from was a traditional high street lender, but those days are long gone. Nowadays, there’s a plethora of different types of lender from whom you can get a business loan, for an ever-growing list of different reasons.

The Benefits of Small Business Loans

Having a degree of manageable debt is a normal part of business life, and small businesses come with a range of benefits for those who take them out:

Grow your business

Growing a business often requires a certain amount of cash up front, and that’s not something that every business has to hand. Small business loans can cover that gap between the need to grow and the point at which you start to see the benefits of that growth.

Ensure your liquidity

One of the key skills required to stay ahead of the curve in business is being able to respond quickly to changes in practices and new opportunities. Having the extra financial liquidity to act quickly through borrowed money could reap your business significant benefits. And even if you’re happy as you are, that liquidity can come in useful if you find yourself on the receiving end of unexpected or unforeseen costs.

Stay in control

In business, it’s common for external investment to be injected into a company to facilitate growth, but this comes at a cost. Investors will often expect some degree of control over how your business spends its money, up to the decision-making process itself, and this will dilute the amount of control that you have over it. By skipping investment and borrowing instead, you can stay in charge of your business.

Boost your creditworthiness

Borrowing successfully leads to what we might call a ‘virtuous circle’. The more you borrow and repay on time, the more you prove your business creditworthiness, and the cheaper and easier it becomes to borrow again in the future, should you need to.

Streamline your existing debt

Many businesses will have ongoing financial obligations flying in from all over the place, at different times of the week, month or year, and with different interest rates attached. One small business loan could consolidate all your other borrowing into one easily manageable place, saving you time and effort in matching up and paying out a lot of different creditors.

Types of Small Business Loans

Secured business loans

Unlike unsecured loans, secured loans require businesses to put up an asset as security; such assets are known as ‘collateral’. The level of security required will depend on the amount you wish to borrow, but property, equipment or vehicle can all be used as collateral, depending on the circumstances. A secured loan is less risky for lenders because they are entitled to repossess the asset if your company fails to maintain payment, meaning that interest rates are usually lower than for unsecured business loans.

Unsecured business loans

Unsecured business loans don’t require any collateral, so they may be suitable for business owners who either don’t want to or are unable to do so. You will borrow a lump sum amount of money and pay it back in instalments. It’s clean and easy, but the lack of collateral will mean that interest rates are higher, so they will cost you more. And while unsecured loans don’t require security, they may need a personal guarantee, meaning that liability for repayment falls to you personally if your company struggles to maintain repayment.

Short-term business loans

Sometimes you just need money quickly. Unexpected business costs can quickly become the bane of your working life, but in these situations, short-term business loans could work for you. They usually have a quicker turnaround time for approval because they’re set up for this very purpose, but there’s a cost to this convenience; interest rates are usually higher than for more ‘traditional’ loan types and you need to be certain that your business will be able to manage repayment of them.

Working capital loans

Working capital loans are another form of short-term loan which may be suitable for businesses whose incomes fluctuate across the course of a year. It may be that you need more money at some times of the year than at others, and have more money coming in than at others. Working capital loans can help to smooth those ups and downs, though again you need to ensure that your company will have the ability to repay them as they fall due.

Invoice financing

Just as invoicing is an everyday part of business life, so are unpaid invoices. But while this is a common annoyance among those waiting to be paid, those unpaid invoices can be put to work for you if used as security against borrowing. There are essentially two types of invoice financing; invoice factoring and invoice discounting. Invoice factoring allows the lender to take control of your invoices, so your customer will need to pay the lender directly. The lender is then responsible for chasing up payments. Invoice discounting works slightly differently. Your company will continue to manage your invoices, meaning that customers won’t know that you are using this credit facility, but you will then need to repay the lender as per the terms of your agreement.

Asset financing

Asset finance is another type of secured borrowing in which your borrowing is secured against assets such as equipment or machinery. This allows businesses access to the tools they need, even if they can’t afford to buy the items outright.

Asset finance can work in several different ways. It can work like a lease agreement, in which you pay a sum each month to use a piece of equipment for an agreed period, after which you return the item. But this isn’t your only asset financing option. You may be able to spread the cost of an asset over a fixed period and take ownership of the asset once you’ve completed your repayments. You can even refinance high-value assets if you already own them outright. Lenders who offer asset financing will usually offer loans up to a certain percentage of an asset’s value.

Credit lines

Credit lines offer you a greater degree of flexibility in terms of how much you borrow in the first place. Rather than applying for a fixed sum of money, with a line of credit you can borrow as much or as little as you need in much the same way as you might with a credit card. You only pay interest on the amount of credit that you actually use rather than the whole credit limit, and repayments are typically more flexible than on term loans. Some forms of credit lines are ‘revolving’, meaning that once you’ve repaid what you owe you can access it again.

Merchant cash advance

If you bring in a lot of money by credit or debit card payments, merchant cash advances are an extremely flexible way of borrowing. With this type of financing, banks and merchants work together to deduct an agreed percentage of your card transactions at source. The more card payments you process, the quicker you repay what you owe, but these are dependent on you knowing how much you take through card payments and the lending tends to be for smaller amounts because it’s so closely tied to your actual business income.

Government loans

Governments and other authorities will often offer businesses attractive options to borrow for them. At present, new startups can apply for SME loans from £500 to £25,000 through their Start Up Loans Scheme. To apply for this type of loan, you must live in the UK, be over the age of 18 and have (or plan to start) a UK-based business that’s been fully trading for less than 24 months. Depending on the business that you’re in, it’s also worth keeping an eye on what grants may be available in different sectors. Government or local authority grants have the considerable advantage that they don’t have to be repaid.

How to Get a Business Loan

Determine why and how much you want to borrow

From small amounts of liquidity to tide you over to a full revamp of your equipment or systems, the amount that you need to borrow in the first place has to be your first step. Some business loans are better suited to large amounts and others to smaller, but you’ll be paying interest on everything that you don’t borrow, so you don’t want to be throwing money away paying interest on an amount of money that you didn’t even need in the first place. But at the same time, borrowing too little will be unlikely to address your business needs and may even make things worse, so make sure that you’re hitting that sweet spot of borrowing the amount that you need.

Calculate how long it would take you to repay the loan

The amount that you want to borrow isn’t the only amount that you need to take into account. Shorter-term loans may have higher interest rates, but these can even work out cheaper than longer-term loans taken out at higher rates. Again, it’s about finding the solution that matches what you need at that time.

Identify the type of business loan you need

As we’ve already seen, there is now a plethora of options available to business borrowers. Would you be happy to offer a personal guarantee? Do you have assets that you could offer as collateral?  No one knows the answer to these questions better than you.

Check your eligibility

Check your business credit score, annual revenue, time in business, and any potential assets that you decide to put down as security before you proceed with any application. Different lenders have different criteria, and you want to make sure that you’re likely to meet that criteria before you start your application process. Some lenders offer pre-checks, which give you an indication of whether you’ll be accepted before you begin the formal application process.

Look out for any specific terms and conditions

Different lenders will have their own sets of criteria and conditions. There is no point even applying for a secured loan, for example, if you can’t offer security, while merchant cash advances will likely be off the table unless you take a substantial proportion of your income from card payments. If you are required to give a personal guarantee, your personal creditworthiness will come into play. In this eventuality, you need to make sure that your own credit record is accurate and up to date.

Prepare your documents and submit your application

Once you’ve chosen how much you want to borrow and how you want to borrow it, pay special attention to what documents the lender needs to process your application as smoothly as possible. The requirements will differ from lender to lender and from loan type to loan type, but generally, you’ll be expected to provide your name, your business name, loan purpose, desired loan amount, business tax ID and, where necessary, details of any collateral that you can offer. Remember: repeated credit applications–and in particular applications that have been rejected–are extremely bad for your business credit score, so it’s important to get these details right the first time!

Small Business Loan Requirements and Eligibility Criteria

There will be other criteria depending on your chosen lender, the type of loan, the amount of loan, and how long you need to repay it, but there are fundamental criteria that everyone must meet to be approved for lending. You must be 18 years of age or older to legally borrow money in the UK, and most UK lenders will expect you to have the right to live and work in the UK, and for both you and your business to be based in this country. You'll also need to pass credit checks and demonstrate you can afford to repay what you’re borrowing plus interest and other fees or charges.

Your business will come under the spotlight too. You’ll need to provide company accounts and projections for future revenues. Make sure that these are accurate and not overblown (underwriters are highly skilled at detecting when figures are being over-inflated and may reject applications on this basis).

Can I Get a Business Loan if I Have a Bad Credit History?

The exact eligibility criteria for those with a bad credit history changes over time, but broadly speaking yes, it is possible to get a business loan if your own is patchy, though this will depend on how patchy it is (one late credit card payment five years ago is a very different beast to, say, a recent bankruptcy) and it will cost you more. You may wish to consider whether it would be worth taking the time to repair your credit record before making your application, though how long this might take will be dependent on your own record.

You can start by requesting a copy of your credit file from the credit reference agencies. The most prevalent of these are Experian, Equifax and TransUnion (formerly CallCredit). You can query anything on there that isn’t right–mistakes do happen!–but do bear in mind that credit reference agencies are required to maintain an accurate record of your credit history, so requesting that something on your report which is factually correct but which you don’t like being there is removed will be likely to fall upon deaf ears. Bear in mind that not all lenders report to all credit reference agencies, so don’t rely on one credit report alone!

Tips for a Successful Business Loan Application

Being rejected for finance can hurt. Not only does it reflect badly on your business’s future creditworthiness, but it can be embarrassing, and this is before we even get onto the subject of how much of a waste of time it can be. But while we cannot guarantee that you will be approved for every loan that you ever apply for, there are simple steps that you can take which will maximise the likelihood of your application being approved.

Make sure you understand your business

From a lender’s perspective when examining applications for business loans, one of the biggest red flags comes when the applicant is unable to answer straightforward questions about their business. Make sure that you’re comfortable with talking about all aspects of your business, including its past performance, present challenges, and plans for the future. Think like a Boy Scout: be prepared!

Keep your records up to date

When a lender comes to assess your business they will expect to receive your latest records, including bank statements, statutory and management accounts, proof of revenue, contracts, etc. Make sure that you can get these easily, and that you present them in a manner which will be easy for the lender to understand.

It’s simply good business practice to keep all your records up to date-and readily available. Set strict deadlines on reporting and stick to them. If you’re unable to do so, it may be time to engage the services of an accountant. Accountants cost money, but they’ll likely save you money in the long term as well.

Have a plan

One of the most common purposes we hear for a business loan is to support ‘cash flow’. Well, this sounds reasonable, as long as you know why your current cash flow is short and cannot support your business. Is this because you’ve had to pay out for some extra stock to get you through an increased sales period, or to pay overheads while you wait for a third party to settle a balance?

Knowing and being able to present the details behind the purpose of the loan is important to any lender, as it would be to anyone parting with their cash. We recommend that you have a clear plan of how the money will be spent, and how this will support your growth plans

Stay honest

It should go without saying that lying to a lender about your application is a bad idea, but the temptation to overstate to borrow more can be strong. Underwriters are trained to see discrepancies and inconsistencies, and the best way to avoid those is to simply be honest and open about your company and its need to borrow. It’s also worth remembering that many of these checks are affordability checks. They’re not only being carried out for the good of the lender; they’re being carried out for your good as well because overstretching with your borrowing can have ruinous consequences for any business.

Don’t over-commit too early

Pace yourself. Every time you borrow, you’re making a long-term commitment (even ‘short-term’ lending could have a term of up to two years, while the impact on your credit scoring will last for at least six) and many businesses make the mistake of committing too much, too soon. Every time you consider external financing options, think about the long-term impact it will have upon your company (and, in the event of them being offered as security, its assets), and keep in mind your medium to long-term targets for profitability and growth.

Manageable debt is a part of business life, and there are more options to be able to take advantage of this than ever. From credit lines or short-term loans to longer-term secured loans, there are solutions which will meet your needs, whatever they may be. Whether you need hundreds or millions of pounds to kickstart your business, the answers may be out there, and by borrowing you don’t even need to surrender any control of your business, as you might with other forms of outside investment. So long as you’ve done your research, believe that a loan is what you need to grow or stabilise your business, and have everything you need to apply, borrowing to move your business forward is an attractive option that you can use to your advantage.

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