During the lifespan of a business, there may be many different times it requires a loan. The reasons for a loan can be varied: it could be to fund growth, to acquire new equipment or solutions, or to overcome struggles or challenges that may be affecting the company.

Regardless of why a business needs a loan, the key to success in getting one is knowing what to apply for and how. In the case of most loans, you will need to provide specific information relating to your business; you will also want to make sure that any loan you apply for is right for your business.

We have put together the six steps to follow to get a business loan, from searching to filling in that all-important application. By knowing what to do, you can guarantee loan success and help your business to achieve its goals with finance in place.

• Know why you need a loan
• Know how much you need to borrow
• Find the right loan for your business
• Understand the terminology
• Put together the information
• Fill in the application

1. Know why you need a loan

The first step to getting a business loan is understanding why, and if, you need one. Depending on the needs of your business, the type of loan you get may differ – for example, finance for business growth won’t be the same as a bail-out loan. Because of this, it’s essential to take time to consider what your goals are in seeking a loan and what kind of loan will address those goals.

While determining what your need for a loan is, you should carefully consider if you need one. There are some cases where your business may need funding, but a loan won’t be the best solution. If your business just needs a quick injection of cash flow, you may wish to utilise other types of finance as opposed to your traditional loans, such as invoice finance, trade finance and hire purchase. It is worth researching and considering the alternatives to make sure a loan is a right route for you.

When considering whether obtaining a loan is right for you, it is crucial to understand what the consequences for you and your business may be. While loans can give you significant amounts of money to invest in your business, they do need to be repaid, with interest. This means you will have a regular outgoing on your monthly finances for the entire term of your loan, which will need to be accounted for in terms of business costs, cash flow and financial plan. And, if you can’t afford the payments on your loan, you put your whole business at risk – which is never the end goal for any owner.

This means that, before getting any kind of loan, you should be confident that you can repay it. Always remember that there is a high probability that you may well have personally guaranteed the loan as well. If you aren’t, it means you need to consider alternative solutions for your funding issues.

2. Know how much you need to borrow

When seeking a loan, it is important to know exactly how much you need to borrow to meet your goals. The reason that this is important is that some businesses take out a loan they are quoted, then realise they needed more money, leading them to take out another loan. As well as spreading the debt you owe across multiple providers, which might be in breach of the first loan you took out, taking out many loans at one time can affect your credit score negatively and conversely put your business under more financial strain.

Spend time working out what figure of money you need for your company, using cash flow forecasts. This will help you to determine what monthly repayments you can afford and the impact this will have on your regular in and outcomes. Using a loan calculator will help you to do this.

As part of this, you should have add a contingency factor should your funding requirements be understated. Make sure you are confident that, regardless of your circumstances, you will be able to meet the loan repayments.

3. Find the right loan for your business

Once you have decided to pursue a loan, the next step is deciding which one to apply for. There are many different types of loan in place to help businesses, and they can vary by the kind of business they cater to or the conditions applications need to meet.

Government-backed

One type of loan is government-backed. There are many types of loans that fall under the umbrella of government loans, ranging from the Export Working Capital Scheme – which helps businesses to fulfil high-value export orders – to regional growth funds which aim to help companies operating in specific locations around the UK. Government loans may also appear in times of crisis, such as with the recent Coronavirus Business Interruption Loan Scheme and Bounce Back Loan Scheme.

The benefit of government-backed loans is that they will often have incentives, often as these loans are seen as helping the UK economy. These incentives may include lower interest rates and reduced fees. They may also have guarantees up to a certain extent, should businesses be unable to keep up with payments. Equally they may also come with a premium as they might support riskier businesses.

Another advantage is that these loans are often extensive, covering many different business types and larger sums of money. However, as with any lending, there can be restrictions so you should make yourself aware of what these are before applying.

To see the different types of government loans and funding available, you can search here.

SME-specific

Another common type of loan is those explicitly aimed at smaller businesses. Small businesses often require funding to help them overcome the challenges involved in starting a business and achieving growth for their company – and due to this, there are many options open to them.

One type of loan is the government-backed Start Up Loan. The value of these loans can range from £500 to £25,000; however, these loans are not secured like a typical business loan. The loan must be repaid over one to five years, at an interest rate of 6% annually. This type of funding is also accompanied by free support from the government to help you grow your business.

There are plenty of other providers that offer SME loans up to typically £250,000, these might be unsecured.

If your small business or start-up is based on a particularly innovative idea or is filling a gap in the market, you may be able to access grants and funding related to this.

Peer-to-peer

Another potential source of funding is a peer-to-peer loan. P2P finance is a way of matching businesses up to lenders, using online resources. For businesses, these tend to a large number of individual investors who collectively lend to the company, while the P2P platform used facilitates the arrangement, so you deal with the platform rather than multiple lenders.

P2P loans are a great alternative solution to anyone who struggles or doesn’t wish to get finance via a high street lender. It offers both lenders and loan recipients a better rate than they would expect to get elsewhere, and for the borrower can often act a lot quicker.

P2P lending is particularly useful if your company has traded for a number of years and has a positive balance sheet, where you have assets in place that can be secured against the finance, then higher funding and better rates may be achieved.

High street loans

When people think of loans, they are likely thinking of commercial loans. These loans are typically offered from traditional high street banks or other lending businesses, such as the challenger banks, and tend to cover a variety of business types and sizes.

High street loans tend to be best suited to businesses have a good track record of repaying debt – and as a consequence have a high credit score. This will make you a better prospect to banks, increasing the likelihood of you being accepted with the resulting lower rates.

Loans may differ depending on the provider you choose, which is why it is essential to spend time researching the different options available. It is also worth reading the fine print on any loans you are considering, as this will give you information on payment terms, personal guarantees and interest rate. Interest can vary between loans, and for some loans can be particularly high, so you will want to try and find the lowest rate possible. You may also have to pay some fees.

With so many different loan types on offer, it can be hard to determine which is the best one for you. That is why it is advised to get independent financial advice before committing to any loan – such as via a broker.

4. Understand the terminology

If you are new to business loans, you may find there is a lot of jargon to decode. However, knowing the terminology around loans can help you to identify the advantages and disadvantages around a loan and decipher if it is right for your needs.

One such piece of jargon is ‘term’, which refers to the length of your loan – otherwise, how long you will have to repay. Terms can differ depending on the type of loan, generally ranging from two to five years. Generally, the longer the term, the lower the monthly repayments are – but the longer you will be charged interest.

When it comes to interest, this comes in two main types: fixed-rate and variable. Fixed-rate interest is when you pay a consistent amount of interest over a certain period, which may be the entire term of the loan or for a set number of years. This means your payments will remain at the same amount during this period.

Alternatively, a variable rate interest means that your interest may lower or rise over time, usually in line with inflation. This means that, depending on how the interest varies, your payments could either increase or decrease until the loan has been paid off, making it harder to account for a consistent monthly outgoing. Typically, variable rates apply on overdrafts.

Next, you can have secured and unsecured loans. A secured loan is usually one which has a higher value and will require assets to be in place to back the loan – meaning, if payments can’t be kept up, there is a way for the lender to collect any lost capital and interest in other ways. An unsecured loan does not have this requirement, though interest rates tend to be higher to counteract the increased risk and invariably a personal guarantee may be given.

By knowing this terminology, you will be better accustomed to understanding the fine print on any loan you choose to apply and understand what the consequences of taking the loan will be on your business.

5. Put together the information you need

Many providers will require you to supply certain information about your business to make sure you are an eligible candidate. So, ahead of applying for any loan, it is essential to have this information in place.

Standard information that you should understand include documents relating to your credit score and credit history – this will verify your past lending record and determine your perceived ability to repay the loan. Lenders will ask for information including your last filed accounts, management accounts, bank statements, personal assets, etc as well as details about what you will be using the loan for.

Before applying for a loan, take time to find out what documentation you need to provide. You should make sure that you have everything ready that is required, and do so in an organised manner, as missing information can result in delays to the process or refusal of the loan.

6. Fill in the application

You have done the research, received independent advice and decided on the most suitable loan option for your business. Now, the final step is to fill out the application.

Loan applications can be extensive, particularly when you add on the time it takes to collate the required documentation. However, it is essential you set aside the time to do it properly.

When filling out an application for a loan, you should make sure to provide as much information as possible, in the relevant fields, as this will reduce the chance of the lender having to contact you for further details, causing additional delays to the process. You should also make sure, to be honest through the application, as this will allow the lender to make a fair assumption as to whether your business is an eligible candidate. Our seven tips to filling out a business application will help you to know what to look out for.

Once you have completed your application, remember to double-check it to make sure you have filled everything out and that there are no missing fields – as this could cause delays in you getting accepted for a loan.

When the application is filled and sent, you will need to wait to find out if you have been accepted. Depending on the provider, this can take between days and weeks, so be patient. And, if you get the news back that you have not been accepted, it may be time to consider the other options available for you.

Get advice for securing a business loan

Business loans can be beneficial in enabling businesses to secure their goal, whatever those goals may be. However, it is crucial to be fully aware of what having a loan entails and make sure you are confident in the investment you have chosen. It is equally as important to apply efficiently so that you can increase the chances of getting accepted.

If you need advice on the loans that may be suitable for you, or on how to apply for one, we are here to help. Our team of advisors have expertise across a range of different loan and finance types and can talk you through the possible solutions for your business.

Please call the team today for a free consultation on 0203 327 0567 or email [email protected].