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How to apply for a business loan

UK businesses borrowed £477 billion in 2022, according to IBIS World - here's our guide on how to get a business loan.

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how to get a business loan
When you apply for a business loan, the lender will want to see evidence that you have calculated how much you can afford to pay back each month.

What types of business loans can you get? 

Investing in technology, scaling up production, developing new markets, changing premises  –  whatever your plans may be, taking out a business loan is often the best way to inject capital into your company. But what type of business loan should you choose? The best type of business loan will depend on why you need the money and the type of company you have. 

The three main types of business loans are: 

  • Secured: This type uses your business assets as security and, therefore, offers a lower rate for repayments. However, the lender can take your assets (e.g., vehicles, property or stock) if you don’t keep up with repayments.

  • Unsecured: An unsecured business loan does not require assets as security. As a result, unsecured business loans have higher interest rates and are usually for smaller amounts. 

  • Start-up loans: The government’s Start Up Loan scheme offers unsecured loans of between £500 and £25,000. Other lenders also provide loans for businesses that have been operating for less than three years. 

How long does it take to get a business loan?

The Open Banking system has helped speed up the processing time of business loans in recent years by allowing banks and other lenders, with your permission, to access read-only information via Application Programming Interfaces (APIs). However, you will usually still need to supply certain documents, such as PDFs of your recent business bank statements, to apply for a business loan. 

The length of time it takes for the cash to arrive in your account depends on various factors, including the type of loan you're applying for and how long it takes you to get your paperwork together. However, if you're organised, you should be able to access the funds within a matter of weeks rather than months. If you need money faster than that, you can also consider applying for emergency business finance. 

What are the alternatives to a business loan? 

Depending on the reason you need the money, potential alternatives to a small business loan could include:

  • Taking out invoice finance

  • Getting a credit card

  • Arranging a short-term overdraft

  • Attracting new investors

  • Applying for a government grant

  • Using a crowdfunding service

How to apply for a business loan: your step-by-step guide

Step 1: Crunch the numbers 

When you apply for a business loan, the lender will want to see evidence that you have calculated how much you can afford to pay back each month and how long you need to repay the loan.

Questions to answer as part of this process include:

  • What are the business loan requirements - are you eligible?

  • How much do you want to borrow?

  • How will you use the money?

  • How long do you need to repay the business loan?

  • How much can you budget for monthly repayments (including interest)?

  • Are you looking for a secured or an unsecured loan?

  • Are you happy for your personal assets to form part of a security agreement?

Step 2: Compare business loans 

If your company is already established, your business bank account provider should be your first point of call. However, you should always compare its offer with deals from other lenders before choosing.

Our comparison service allows you to filter the options available from a selection of leading business loan companies by the amount you need to borrow. When assessing deals, consider the following:

  • Annual Percentage Rate (APR). This represents the interest rate paid by at least 51% of successful applicants. Is it the lowest available?

  • Repayment Terms: How long do you have to make repayments, and how much is each one?

  • Fees and charges: Do you have to pay an arrangement fee?

  • Penalties: What are the consequences if you can’t meet the repayment schedule?

Remember that the advertised interest rate may not always apply to your situation. The APR can vary based on your circumstances. For instance, if your business has a poor credit rating, you might be required to pay a higher interest rate.

Step 3: Choose a business loan provider

Many of the most affordable business loans come from lesser-known online providers. However, this doesn’t necessarily mean you should dismiss these lenders. The companies in our comparison have undergone thorough checks. Nevertheless, conducting some research before deciding where to secure a business loan is advisable. Consider the following steps:

  • Check with the FCA: Approval by the UK's Financial Conduct Authority (FCA) provides reassurance, but not all providers must be authorised. Investigate why a lender is not regulated to understand how this could impact your business.

  • Check online reviews: Explore online feedback and pay attention to any recurring red flags other users mention.

  • Verify contact details: If a website lacks a registered address, this should raise concerns. Call the provided telephone number to ensure it is legitimate.

  • Ensure digital security and GDPR compliance: Verify the company website's digital security (SSL certificate) and confirm compliance with the General Data Protection Regulation (GDPR).

Step 4: Prepare the necessary paperwork

Depending on the loan provider and the type of loan you are applying for, you will often need to prepare digital or paper copies of the following documents to get a business loan:

  • Company director ID and proof of address 

  • Bank statements

  • Financial accounts

  • Business (and sometimes owner’s personal) tax returns

  • Information on other debt held

  • Details of business or personal assets for a secured loan

  • Business plan

  • Financial forecast

  • Balance sheet

Lenders also consider your company’s credit rating during the business loan application process, so it’s important to ensure it is accurate and take steps to improve it where possible before applying. Easy ways to do this include disputing errors and updating outdated information.