How to get a business loan: a step-by-step guide

Running a new or small business is hard work and expensive. You can work all hours, but without a capital injection, staying afloat long enough to make a profit can prove challenging. This is where business loans come in.

What is a business loan?

A business loan is similar to any standard personal loan you can get from your bank, with some key differences. It must cover work-related transactions only and be opened in your company’s name, rather than your own name. 

As with a personal loan, there are two main types of business loan:

• Secured loans – You put up something you own, such as your home or business equipment, as security. If you fail to make a full repayment on time, the lender can seize these assets

• Unsecured loans – Unlike a secured loan, you don’t risk losing property if you fail to make the repayments, but your credit score would suffer. Also, interest rates are usually higher because there’s more risk to the lender

Both types are typically available for new companies to borrow £500 to £25,000 for one to seven years. 

Pros and cons of business loans

Business loans suit many small or new companies, but might not be the right choice for you. Here are the main pluses and minuses:

Pros

• Provide funds quickly to get your business started or to expand

• Covered by nationwide regulation, meaning lenders must abide by a strict code of conduct

• Plenty of choice, with dozens of lenders offering flexible loans

Cons

• Not risk-free – even with a sound business plan and loan repayment strategy, things can go wrong, meaning you may struggle to make repayments

• If your business fails and you have a secured loan, you could also lose your home

• Any missed repayments show on your credit report, damaging your credit score and making it more difficult to borrow in the future

How to get the right business loan

If the pros outweigh the cons and you want to take out a business loan, here’s how to go about it:

Step 1: Be realistic

Whether it’s to cover six months’ rent, buy tools or stock, or cover business insurance, calculate the exact sum you need. You can add a small buffer, but be realistic: the more you borrow, the more interest you pay.

You must be confident in your ability to make repayments and be prepared to present your strategy as part of a business plan. 

Step 2: Check your finances

Check your personal and business credit report (if you have one). Report any errors to the relevant credit reference agency. 

Also, look to improve your report before applying. This could include getting a balance transfer credit card to consolidate credit card debt, paying off small loans and store cards, and chasing outstanding invoices.

Step 3: Shop around

Browse the market for business loans, focusing on those offering the sum you want for the lowest interest rate over the repayment term you need. Also, read the loan contract, noting any penalties and fees. 

Step 4: Run eligibility checks

Run free eligibility checks on comparison sites or with lenders to determine whether your loan application is likely to be successful. Eligibility checks don’t show up on your credit report, meaning your credit score doesn’t suffer. 

Step 5: Get organised 

Once you’ve found the right loan, take the time to gather all the necessary information. This includes:

• Bank statements

• Personal and business tax returns (if you have started trading)

• Legal documents (such as any necessary business insurance and licences)

• Proof of ID and address

• Trading history

Make sure you meet the application criteria before applying. Typically, you must be at least 18 or 21 years old, have a UK postal address and be able to justify why you need the loan and how you plan to use it. Take time to read the terms and conditions, noting any special conditions, such as:

• Needing a business bank account to take out a loan

• Having to sign a personal guarantee pledging to cover repayments if the company defaults 

Also, check that the lender is on the Financial Services Register, especially if the company is unfamiliar.

Step 6: Apply

You can usually apply for a business loan by post, in branch or via the lender’s website. In all cases, take care to read through and complete a draft of the application form. Keep a copy of your submitted form. 

Step 7: Be patient

It can take anywhere from a few days to a few weeks for the decision to be made and the money to come through, assuming you’re successful. The exact schedule depends on factors such as the complexity of the application and whether you applied by post. 

What if my business loan application fails?

Running an eligibility check normally helps avoid this outcome. However, if your application fails, don’t automatically reapply for a loan, because this action is likely to harm your credit score. 

Before all else, scrutinise your application for possible mistakes. Note that bankruptcy, scant or no business credit history, and a poor business plan can all influence the lender’s decision. 

Likewise, double-check the terms and conditions, because some lenders don’t accept applications from high-risk businesses or for specific purposes, such as property development. 

If you still don’t know why your application was rejected, ask the lender. It must give you an explanation if you request one within 30-60 days of the rejection. 

What are the alternatives to a business loan?

There are several alternatives to getting a business loan, including:

• Business credit card – Works like a personal credit card, but with business perks, such as invoicing facilities

• Personal loan – Easier to get, but loan amounts tend to be smaller, and it doesn’t help build your business credit score

• Finance agreement – Targeted lending for specific items, such as a car or office equipment

• Crowdfunding – A peer-to-peer loan funded by individuals rather than corporations, but it comes with risks

• Government business grant – Typically offered to new or evolving companies

• Overdraft – A short-term solution available with a personal or business current account

What is the government’s Start Up Loan?

The government’s unsecured Start Up Loan is available to companies that have been trading for less than 36 months. It offers loans of between £500 and £35,000 for one to five years at an APR of 6%.

Read more …

• How do business loans work?

• Types of business loans

• Am I eligible for a business loan?