Running a business presents all sorts of challenges and opportunities. Whether you have ambitious growth plans, want to improve cash flow, or purchase stock or materials it’s important to know what options are out there to provide the support that you might need.
A business loan is a common tool used by businesses to raise finance. A lender provides money that the borrower pays back in instalments over a specific period. Interest is charged on the loan over the course of the agreement. Loans can start from as little as £500 and can run up to millions of pounds.
Different types of business loans
In the UK there are several different types of business loan available, but broadly they can be split up into secured or unsecured loans:
A secured business loan allows you to use a company asset – such as a vehicle fleet or property – as security. An unsecured business loan allows you to borrow money without having to offer any assets as security.
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How do business loans work?
Applying for a business loan involves some important steps – but keep in mind that the process will vary depending on your circumstances, the lender and the type of loan you’re applying for. Preparedness and communication are key here – it’s important to be upfront and responsive so that there aren’t any unexpected hurdles further down the line.
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What are the typical criteria for business loan applications?
Lenders will look at a whole range of criteria when assessing suitable financing solutions for your business. There are the basics such as being over 18, a UK resident and having a UK-based business and bank account but additionally they’ll consider:
– Credit score
– Business annual revenue
– Number of years trading
– Net operating income
– Potential collateral (for secured business loans)
You may well end up qualifying for more than one type of financing from a range of lenders.
How to build a strong business loan application
The stronger your loan application, the more likely you are to get approved. Although not all lenders may ask for a business plan, it’s a comprehensive and credible way to present the information required as well as your vision for the future.
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Pros and cons of business loans
Pros
If you have exciting and ambitious growth plans or want to maintain your existing success, then a business loan offers several advantages. The quick access to capital it provides can be used for:
– Purchasing equipment, inventory or commercial premises
– Expansion and hiring more staff
– Business diversification
– Bridging short-term cash flow issues
Additionally, a business loan enables you to:
Retain control and ownership of your business (unlike an equity investment, which involves granting a share of your business in exchange for funding)
Build your credit history (successfully repaying a loan can help improve your credit score)
Furthermore, you will be working to a clear and fixed repayment schedule.
Cons
A business loan is not the only way to raise finance for your business and is not suitable for everyone. It’s worth bearing the following in mind:
– Total repayment will be more than the value of the loan and interest rates may vary
– Additional charges if you fall behind or miss a payment – this will likely affect your credit score too
– The assets you use as security may be at risk if you default on a business loan (secured business loans only)
– Future market conditions may not be as favourable as the time you take out the loan
Finally, make sure you fully understand the terms and conditions of your loan as you may be charged if you pay back the loan early.
Different types of business loans
In the UK there are several different types of business loan available, but broadly they can be split up into secured or unsecured loans:
A secured business loan allows you to use a company asset – such as a vehicle fleet or property – as security. It works for the lender because it’s essentially a guarantee that they’ll be able to recoup the value of the loan in the event of repayment terms not being met. And it works for the borrower because the repayment terms are often better (lower interest rates) because the risk is reduced for the lender.
[link to SBL loans demystified here? – otherwise repeating detail]
An unsecured business loan allows you to borrow money without having to offer any assets as security. This means the terms of the loan are unlikely to be as competitive as a secured business loan and you may need to provide a guarantee that you’ll pay back the loan personally if the business isn’t able to.
Either way, the longer your loan term the more you’ll pay in interest overall.
How do business loans work? From application to approval
Applying for a business loan involves some important steps – but keep in mind that the process will vary depending on your circumstances, the lender and the type of loan you’re applying for. Preparedness and communication are key here – it’s important to be upfront and responsive so that there aren’t any unexpected hurdles further down the line. Typically, you would expect the following steps:
1. Research
Identify why you need the loan and how much you need to borrow. Then you can look at what type of financing you feel will best suit your business goals. Start collating the relevant financial documents you will need and research the lenders that offer the right products. A coherent, transparent and robust business plan is an integral ingredient as it will demonstrate that you have a clear vision for the future of your business.
2. Application
The application process can be in person, over the phone or online. Either way, the lender will be looking to gain an understanding of your business and the reason for requiring extra finance. You’ll be expected to supply documentation ranging from financial statements, forecasts and tax returns. You may want to run an online eligibility checker that won’t affect your credit score. The eligibility checker can often return indicative results within minutes, with the timescale from application through to the funds being received ranging from 24 hours to several weeks.
3. Lender review
The lender will then begin a first review of the submitted information and accompanying documents as well as a credit check. This visibility enables them to conduct due diligence on the current financial health of the business to determine past trends, future prospects and, crucially, the ability of the business to repay the loan.
4. Decision and offer
If the application is approved, you’ll receive an offer with all the details of terms and conditions including:
– Loan amount
– Interest rate
– Repayment terms
– Any additional fees or conditions
It’s crucial you check the paperwork to ensure the offer is what you expected and that you’re confident the repayment terms are realistic and manageable.
5. Underwriting
This is the lender’s final risk assessment as its underwriting team analyses and verifies all the documents and circumstances relating to the application one final time before approving the funds to be released. They may also ask for extra documents or information at this stage too.
6. Approval and loan disbursement
The funds are released to your business bank account and the term of the loan begins – including the agreed repayment schedule. The finance will need to be used as outlined in the agreement with the lender.
How to build a strong business loan application
The stronger your loan application, the more likely you are to get approved. Although not all lenders may ask for a business plan, it’s a comprehensive and credible way to present the information required as well as your vision for the future.
Preparation and organisation is key. First, you’ll need the basic company information such as legal business name, the registered address, and the ownership structure. Prepare all relevant financial documents such as tax returns, balance sheets and revenue projections. Make sure you’re across your credit history and credit score. The lender will also want to learn about:
Your vision for the business, including specific business or growth goals and how the loan fits in with this business plan
– Your background as a business owner
– The market the business operates in and the current competitive landscape
– How you intend to repay the loan (including the interest charges)
– The assets that you propose to use as security (secured business loans only)
Your application will reflect on you as a business so ensure it’s clearly presented and check for errors. Fill out any additional paperwork carefully and accurately. The lender may also ask for supporting documents such as contracts or licenses too.