Understanding small business loans
Understanding small business loans

A small business loan is a perfect way to get a quick cash injection into your business. Whether it be for new stock, to see you through tough times, or to invest in your business – considering a small business loan might be the right next step for you. With so many paths to financing available, the right loan for your business is out there. You just need to find it. Finding the right small business loan can be difficult – first, you need to understand what small business loans actually are, how they work, and when they’re most beneficial.

What is a small business loan?

A small business loan is, unsurprisingly, a loan that is offered to small businesses. Small business loans differ from other loans because they’re tailored specifically to the needs of small businesses. So the rates available, as well as the repayment terms, are generally better suited to smaller businesses. They’re highly useful because they allow small businesses to easily unlock the financing they need to invest in stock, promotion, or business development – and they can also take the sting out of difficult financial periods.

The UK Companies Act 2006 defines a small business as any business with a turnover over under £6.5 million, a balance sheet not in excess of £3.26 million, and less than fifty employees.

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How does a small business loan work?

There’s no simple answer because it depends on the specifics of the loan you choose. Certain loans may work via APR or a factor rate. You may choose a small business loan where you have a defined series of repayments over a fixed term, inclusive of interest. You may prefer, however, to have your repayments correspond to a percentage of your earnings – so when your business does well you’ll pay more, but ultimately pay off the loan faster. The only option is to browse the various small business loans available to see which best fits your situation.

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Who is a small business loan for?

Small business loans come in all shapes and sizes to suit a wide variety of businesses in every industry you can think of. So if you’re a start-up, a franchise, you have poor credit, a sole trader or limited company, etc. – you’ll find a loan that is tailored specifically to your needs. Whatever your industry may be, from hospitality to fashion via the motor trade and beyond, if your business needs a quick cash injection, small business loans may be the answer

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What can small business loans be used for?

Some lenders may put specific restrictions on what a general small business loan can be used for if they offer more specific services for those needs. For the most part, however, a small business loan can be used for anything you need it to be. You can put the money towards new premises, or refurbishing your current one. You can bulk-buy stock to see you through a seasonal rush. You can invest in a vehicle for your business. Hiring new staff, or providing further training for any current staff is also an option. As is investing in new equipment. Small business loans can also see you through periods of financial difficulty, and keep your business buoyant when cash flow is limited.

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How long does a small business loan last?

The repayment terms are entirely dependent on the specifics of the loan you choose. It depends on the amount of money you want to borrow, and the rate of repayment that you’re able to comfortably afford. The more you can pay back, the shorter your repayment terms will be. It’s important to prioritise comfortably making the repayments, however, rather than making larger repayments. It’s better to take a longer repayment term you can actually afford than agree to pay back money every month you can’t afford.

Loans can be short, medium, or long term. Common short term loans might last for six months, medium loans eighteen months, and long term loans anywhere from three to five years.

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Types of small business loans
Types of small business loans

Small business loans come in all sorts of guises, depending on what you’re looking for. You can have a loan ranging anywhere from a few thousand to a few hundred thousand pounds. Understanding the different specific types of small business loans offered is essential, however, so you can make a more informed choice about what’s right for you. As with anything, there are benefits and drawbacks with each loan type. It’s all about establishing what you need and then finding the right loan to suit you. To do that, though, you need an understanding of the most common small business loans.

Comparing types of small business loans

Knowing which loan is right for you can be a struggle. Taking it as a given that you understand what you need from a loan, how can you know which kind of loan to apply for to achieve your goals? For that, you need to know a little bit about all the most common small business loans you’re likely to encounter. Knowing their benefits, and drawbacks will help you make the most informed choice possible.

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Unsecured small business loans

An unsecured loan, as the name implies, requires you to put no collateral or security up to cover the loan in the event of you defaulting on your repayments. The primary benefit of this is, of course, that you can get approved that much quicker and you don’t risk losing your property if you can’t repay the loan. The downside is that because there’s no security on the loan, it’ll be considered a much higher liability – this means you’ll face restrictions as to how much money you can borrow, and over what time period.

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Secured small business loan

A secured loan will require you to put up some collateral or security. This is something that you own with a value similar to the value of the loan. In the event of you defaulting on the loan, the property will be taken and sold to cover what you owe. The benefit of this is that secured loans allow you to borrow more money, and the loan is not considered so much of a liability. The main drawback is that if you don’t make your payments, you will lose your collateral.

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Bad credit small business loans

If you have bad credit, certain lenders may offer loan packages just for you. The advantage of this is that you still get access to a potentially very helpful small business loan, even if you have some black marks in your financial history. The downside is that you will be considered a higher risk, so there will almost certainly be restrictions applied to the loan. You may also have to provide some evidence of how you intend to keep up the loan repayments.

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Limited company loans

Limited company refers to the legal structure of the business, whereby the shareholders and management are distinctly separated. The benefit of being a limited company is that in the event of you defaulting on the loan, it’s the company that is liable for it rather than you as an individual. The disadvantage is that getting registered as a limited company can be a time-consuming process. So, if you’re not already a limited company you won’t be able to get access to your money as quickly as you might need it.

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Sole trader business loans

Sole traders can still have employees, a sole trader is someone who is classed as both the owner and operator of their business – there is no distinction between ownership and management. The benefit of this kind of loan is that you can generally be approved quite quickly, as a sole trader is a much simpler business structure. Something to seriously consider, however, is that if you cannot make the loan repayments, you will still be liable for the debt – not your business as an entity.

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Micro business loans

A micro business is generally accepted to be one that operates with fewer than ten employees. Loans catered to this size business will likely be much quicker and easier to apply for because there will be fewer requirements to satisfy. The issue is that a smaller business is likely to have a limited turnover, so there may be an upper cap on how much you can borrow, and for how long. If your business has no path to affording the repayments, you can’t qualify for the loan.

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Bank loan alternatives

Small business finance doesn’t have to come directly through the bank, there are many lenders out there who will offer you a better deal – Capify, for instance. The advantage of securing finance outside of a bank is that often the requirements are more lenient – for example, Capify requires you to have been in business for six months, most banks require two years. The disadvantage is that you might find the application process to be a little more time consuming, as smaller lenders may not have the resources for rapid processing.

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SME loans

SME loans are loans for small and medium enterprises. The benefit is that they’re a perfect way to provide a quick cash injection for your smaller business. This can cover expansion, stock, renovation, staffing, or carry you through a difficult financial period. Be aware, however, that an SME loan is not designed to remedy ongoing financial issues, it’s merely a cash injection, it’s imperative you make sure you’re able to afford the repayments.

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Quick small business loans

When a business needs money, it needs money fast. A quick small business loan’s main advantage is, of course, that you can get approved quickly and that you can get the money into your account sometimes in as little as one working day. The downside of this, however, is that you can only borrow so much money over a short term basis before the size of the repayments makes it an unrealistic prospect for most smaller businesses.

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Emergency small business loans

An emergency business small business loan is ideal for when you face sudden unexpected expenses, such as an increase in your rent or utilities, or maybe something that requires urgent repair. The benefit is that these applications are normally fast-tracked, meaning you’e able to get the money to remedy your emergency as soon as possible. Something for you to be aware of, however, is that you still need to be able to afford to repay the loan before you make your application, even if you’e currently facing an emergency.

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Short term business loans

Short term business loans are ideal for businesses that don’t need to borrow very much money, or that predict they will be able to repay their loan much quicker than usual. The positive of these loans is that, naturally, you’re going to have the debt paid off a lot faster than you would with a medium to a long term loan. To offset that, however, be aware that there’ll almost certainly be higher monthly repayments compared to those loans.

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Flexible small business loans

All small businesses are different and operate in different ways. A flexible loan will offer you a wider selection of repayment options. Naturally, the main benefit of this is that you’ll be able to pay back the loan in a time frame that better suits your business. The drawback would be that it could mean you potentially repaying the loan over a longer period of time, ultimately accruing more interest.

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MCA vs. small business loan

A merchant cash advance differs from a small business loan in how it’s repaid. You’ll still get a lump sum at the beginning to invest in your small business, but repayments will be taken daily as a percentage of your business’ monthly credit/debit card sales. The benefit here is that you don’t have to worry about paying a fixed amount that could harm your cash flow if you have a bad month of trading, with the repayment amount in line with how much your business brings in.

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Small business loan providers
Small business loan providers

Small business loans are a perfect way for an SME to get an invaluable cash injection. But, who actually provides them? It’s all well and good knowing about what small business loans are – but it’s also important to know about where you should be looking for them.Here you’ll find everything you need to know about small business loan providers and the application process. This will allow you to have all the information necessary to make a successful loan application and take the first step towards the next stage of your business growth.

Who provides small business loans?

There are a number of financial institutions from which you can find a small business loan. They all have their own individual ways of formulating the structure of the loan, with unique application processes and requirements you need to satisfy before approval. You can get financing through the Government, through banks and credit unions, finance brokers, peer-to-peer lenders, as well as through alternative finance specialists – like Capify.

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Capify’s small business loans

Unlike most banks, which usually require at least two years to have passed since your business was started, Capify only requires small businesses to have been in business for six months. Our loans are tailored directly to the needs of small businesses and can be just what you need to give your business a quick cash injection.

We lend to all sorts of small businesses, operating in all manner of industries – every small business needs financial assistance now and then, and Capify is here to provide it.

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Direct small business loan providers vs brokers

Direct lenders operate as a single institution – you apply to one company, who assesses your application, and if you’re successful you get the funding from them. Brokers will take your details and then reach out to multiple lenders on your behalf. The benefit of a broker is that you only make one application, rather than to each individual lender. A drawback is that often brokers will place you and your business with the lender who provides them with the largest commission.

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Eligibility for a small business loan
Eligibility for a small business loan

Like all loans, small business loans aren’t just given out to everyone who applies. There are certain requirements you need to satisfy before you’ll be approved for the loan. Those individual criteria will vary from lender to lender, but there are certain general criteria that apply to most. Knowing them means you can make sure you’re able to satisfy them before you apply. Ultimately this saves you time and effort and means you can get your small business loan paid into your account that much faster.

What is the eligibility criteria for a small business loan?

It varies depending on the type of loan, the amount you’re applying for, and the way the specific vendor operates. Some examples would be turnover/profit data, recent bank statements and filed accounts. An overview of your trading history might be necessary, as well as any information about previous debts or county court judgements (if applicable).

You may need to provide evidence of what you intend to use the loan for, as well as a proposal for how you’ll make your monthly repayments. A form of collateral will need to be provided for a secured loan – with valuation and proof of ownership.

This is just a general overview – check with your loan provider for their specific requirements before you apply to make sure you’re eligible.

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How affordable are small business loans

While affordability is subjective, it’s discussed more thoroughly in our detailed article. A number of things affect how “affordable” your loan will be. First is what you can actually afford. Then you need to consider how much money you need to borrow, and over what sort of time frame.

If you have any concerns, it’s important that you reach out to your proposed lender before you apply for the loan – they will be able to give you more specific advice. Depending on your circumstances they have a more appropriate path to financing to offer you.

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Understanding loan credit checks/scores

It can be intimidating trying to understand what you need in order to have an “acceptable” credit history – but remember that most lenders will not deny you a loan for no reason. In fact, credit rating is almost never the sole reason for a loan application being accepted or denied – even if you have a bad credit history, many lenders may still consider your application in the right circumstances.

Remember that if you’re a sole trader, your personal credit will come into play as your finances are not considered separate from your business finances – they would be if you ran a Limited Company. Your business credit will be thoroughly checked, but if you have any doubts it’s best to be upfront as soon as possible.

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What if you’ve been declined a loan?

It can be demoralising to go through the rigmarole of the application process only to be denied, especially if your business really could use that cash injection. It’s important that if you are denied that you understand why – this will prevent you from making multiple applications that are denied for the same reason.

If you’ve been declined a loan, remember that it doesn’t prevent you from applying for another with a different lender. For example, if you’ve been declined by your bank because you don’t meet their more stringent criteria, you can still apply for business financing through Capify – providing you meet our more attainable requirements.

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Applying for a small business loan
Applying for a small business loan

Now you understand more about the background of the various types of lenders that can offer you a path to small business financing, and you understand the sorts of things they’re going to look for when you apply. It’s time to consider actually making the application. It can be a daunting prospect but provided you have some understanding of the process, it can be done relatively simply.

Do your best to be as prepared as possible before you apply. Have all your information to hand, to make it as quick as you can. Here’s what you need to know.

The business loan application process

Before you start your application you should think about how much money you actually want to borrow – if you are using the money for something specific, make sure you’ve properly costed it. You should also be familiar with what you can realistically afford to pay back. Remember that you need to take into account potential interest rates, depending on the loan you choose. Investing the time making sure you know exactly what you need will prevent you from over or under-borrowing.

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Applying for a small business loan online

Apply for a small business loan with Capify is easy – take the sting out of the process and use our simple Quick Quote tool to get the ball rolling – you could potentially be pre-approved in minutes!

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Where can you find a small business loan?

Direct lenders, such as Capify, can offer you a quick decision and fast payout, but you will have to make your applications one at a time if applying to multiple lenders. Brokers can allow you to choose the most appealing deal, but their broad-stroke searches may miss out key information. A government grant can offer very favourable rates of repayment, however, they may be earmarked for very specific circumstances so have more stringent requirements in the application. Banks, building societies, and credit unions may not be suited for new businesses who cannot provide proof of at least two years in business, however, if you do satisfy their application process you could potentially borrow a larger amount of money.

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How long does it take?

It depends entirely on the nature of your loan and the way your lender operates. The actual application can often be done in minutes if you have all the right information to hand. If applying to a bank, it might take several weeks to be processed. Smaller direct lenders may be able to process your application in around a week, depending on their workload. Certain vendors, like Capify, will aim to have your application processed and your loan paid out in as little as a few days.

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What do you actually need to apply?

As always, the specifics will vary depending on the loan and your provider. But it’s a good idea to make sure you have a business plan – give some idea about what the money is going to be used for, and present accurate, up to date costings where possible. You should also provide links to your online presence – website, social media feeds etc. Many lenders use these to establish your business standing, to see how you interact with customers, and if you have consistently negative reviews.

You should have your financial documents ready to present – namely bank statements, filed accounts, receipts and invoices, etc. Anything to give your lender a picture of your business’ recent and current financial health. Proof of your time in business will be necessary. You’ll have to provide different proof depending on the lender, but, if you’re applying with Capify you’ll need to demonstrate at least six months in business.

If you have any history of debt/judgements/warrants or any other evidence of a chequered financial history, present these as well. It’s important you’re honest. You’re far more likely to be successful if you’re as truthful as possible than if you try and hide things you think will count against you. If you have collateral to offer as a part of a secured loan, you should prevent a thorough description of it along with a current valuation and proof of ownership.

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Small business costs and loan repayments
Small business costs and loan repayments

As every loan is individual, it’s difficult to provide specifics in terms of direct monetary amounts. If you can understand the background of what specific costs mean and where to look for them, however, you’ll be in a much better place to make sure you get the best possible deal for you when you’re applying for small business loans.

It will also help make sure you’re never caught out by unexpected charges.

Small business loans costs and fees

When searching for loans, many people simply look at the interest/factor rate, the amount of the repayments, and the length of the term. There is more you need to be aware of, though.

Look at the fees. Your loan provider should be upfront and honest about all the fees you might encounter as a part of your application. For example, broker fees are charged by brokers for aggregating multiple different offers to your application. Late payment fees, which are self-explanatory, but should be clearly presented during the application – if not, make a point of asking. Your lender should, on request, be willing to provide you with a comprehensive list of fees – both standard, as a part of the application/loan repayment process, and potential.

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Small business loan calculator

For a more detailed run-down of your Capify small business loan’s costs, you can use our dedicated Small Business Loan Calculator

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Paying your loan early

You can pay your loan back at a rate that suits you, depending on the loan you take. For example, a Capify MCA’s repayment is taken as a part of your debit/credit card transactions – so if you have a good month, you’ll pay more proportionally. This automatically shortens the term of the loan. If you feel you want to make extra repayments as a part of a regular business loan, you can do that. There is a fixed cost in terms of minimum repayments, but you can pay back however much you want to in excess of that. If you’re in doubt, contact your loan provider for further advice.

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Topping up your small business loan

Sometimes situations change and you need to borrow a little bit extra in addition to what you have already borrowed. Topping up your loan at its most basic level is simply borrowing additional money, and all lenders approach it differently.

With Capify, for example, you can top up your loan only after 60% has already been paid. Any extra money you borrow will automatically go towards paying off your current loan. So if you have £5000 of your loan left, and you borrow £7000 – £5000 will be used to pay off the original loan – leaving you with £2000.

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