Starting a new business is an exciting chapter of anyone's life but many small businesses in the UK fail due to one large problem; insufficient starting capital.
Get the funding you need to grow your business
However, your business’s capital needs can be easily met with the help of a business loan. A business loan is aimed at helping small business owners achieve their goals. The loan operates the same as any regular loan however borrowers can access higher amounts of funds.
Current statistics reveal that up to 99% of all current businesses in the UK are predominantly SMEs (Small-Medium Enterprises). Current financial providers in the UK are offering loan amounts up to £500,000 to assist businesses to achieve their goals.
Whether you have just opened doors, want to expand, perform renovations, or introduce a new product line, a business loan is ideal. We have compiled a few steps to help to start business owners out so that they can get the funding that they deserve.
Here are five steps to ensure that you are approved for a business loan:
Step 1) Is my business suitable for a business loan?
A variety of factors that determine whether a business is suitable for a business loan:
- Business type
- Current business development
- Product lines and range
- Reason for wanting a loan
Seasonal businesses, as an example, are not ideally suited because of the fluctuations in income during out-of-season times. Survival is easy during the high-peak times but, as soon as they busy season passes, the loan can become a burden and greatly diminish an already diminishing profit.
For such cases, it might be better to consider alternative sources of funding such as small business grants, family funding or crowdfunding projects.
Step 2) Know exactly what you need
The first step to obtaining a business loan is understanding the sum of money needed and how this money is going to be spent. A convincing business plan is essential to ensuring that you will get accepted for your business loan. It is pertinent to be very transparent about the sum of money you need and how this money is going to be allocated.
If you intend to renovate your business, why are these renovations necessary? Do you plan to introduce a new product line or range? Is the expansion to introduce new machinery? Will the loan be needed to purchase this machinery?
When compiling your business plan, it is important to include a cash flow projection. This projection should include the monthly loan repayment amount.
The lender should be able to see that you have carefully considered what your goals are and how the loan will realise these goals. If you are uncertain that your business plan is not up to scratch, then get an accountant to check it over for you.
Step 3) Sort out your credit
The lender will check both your individual and business scores when they assess your loan application. New businesses generally have no credit record, making it difficult for the lender to determine if the borrower is trustworthy. For this reason, the lender will then check the applicant’s credit and make the assessment form here.
Before applying for a loan it is important to ensure that both your credit and business credit are in its best possible shape: do not make late payments, do not miss any payments and settle any small loan debts if there are any. Once your business is up and running, your credit score will no longer be relevant, but it is not a bad idea to get matters into order either way!
If you find yourself in a bad credit position but are desperate for that business loan, then there are ways around the dilemma. Bad credit business loans do exist but will come with smaller borrowing amounts and higher rates. The rate that you are provided will differ according to the risk that the lender is taking.
Two ways to ensure that you get the business loan you need is to provide collateral or get a cosigner. Collateral greatly reduces the risk for the lender as they can sell the asset should you divert on your loan. However, you do not want to lose your business and home, so collateral is best-placed on equipment or machinery.
A guarantor is an excellent option
A guarantor is an individual who agrees to take responsibility of loan repayments should the borrower find themselves in a position that they are incapable. This cosigner should be someone that trusts you and that you can trust.
Step 4) Compare terms & requirements
Different lenders and financial institutions have different loan requirements and terms. It is best to shop around and find the terms and requirements that are best aligned to your business and financial situation.
Most lenders in the UK have basic eligibility criteria stating that the borrowing business/borrower should:
- Be based in the UK
- Be over the age of 18
- Not be in the process of bankruptcy
So long as you meet the following basic eligibility criteria you should not be concerned that your application will not be considered. When you are making your business loan comparisons, you should consider the following information:
- Compare APRs (annual percentage rates)
- Loan amounts
- Loan terms
- Fees, charges and any penalties (such as early repayment)
- Processing time of the loan
If you need assistance making the decision, there are tools available to help you. Online loan comparison sites are an excellent place to start. These sites list a variety of different types of loans and have already done most of the calculations for you. There are also built-in loan calculators on most lenders websites that will prove useful if you prefer to make the calculations yourself.
Step 5) Gather all the relevant documents & apply
Loan approval does not happen overnight in the case of business loans, but you can drastically speed up the process by ensuring that you have the correct documentation. Missing information or incomplete documentation can result in major delays or even have your application thrown out before it has even been given the proper chance.
The list below is a compilation of basic documentation that lenders will require but it is best to check the lender’s website or give them a call to make sure what that specific lender requires of you.
- Current and up-to-date financial statements
- Coherent and thorough business plan
- Tax return documents
- Income statements and balance sheets for the past two years (if possible)
- Verified bank account information
Once you have all the documentation in the order you can either take a trip down to the lender to make your application or, thanks to modern technology, you can complete the loan application online.
Either way, these five steps should ensure that you are approved for your business loan.