If you’re a business looking to expand, invest in new equipment, or manage cash flow – you may have considered taking out a business loan.
Business loans come in various shapes and sizes, and it’s important you are aware of the nuances which make each individual loan product unique.
What is a business loan?
A business loan is a financial product where a lender provides funds to a business, which are then repaid over an agreed time period with additional interest. Business loans can provide your business the capital it needs to facilitate growth, however the application process can be rather daunting given the amount of information required, and the variety in the types of business loans available to you. Don’t worry though, we’ve got you covered:
This guide will break business loans down for you step-by-step.
You may be looking for funding to cover expenses that can range from purchasing inventory to funding large-scale expansion projects. Banks or alternative lenders will fund these activities, and they come with terms which dictate repayment schedules and interest rates. Business loans can be secured (requiring collateral) or unsecured (based solely on your creditworthiness and the business case in question). Your suitability for each type of loan will vary based on a number of factors.
Below, we have detailed how to get a business loan so you understand the steps to making a successful business loan application.
Steps to get a business loan
- Assess your needs and business goals
Before applying for a loan, determine how much funding you require and what you’ll use it for. Lenders will want to understand your future plans – so having a clear purpose for the funds and explaining this to your broker is essential. Your broker is there to produce the reports for the lenders so that they can understand your business in detail.
- Understand your loan options
A business loan is one of many financial products available for your business. There are various types of business loans, each tailored to your business’s specific requirements. Your suitability for these loans will depend on a number of factors. Here’s a list of some typical business loans:
- Fixed term loans: Paid back over a fixed period of time, suitable for investing in your business growth.
- Business lines of credit: Flexible borrowing, often for short term requirements.
- Invoice financing loans: Advances based on any outstanding invoices your business has.
- Asset finance loans: Designed specifically to fund the purchase of equipment/assets.
- Startup loans: Targeted at new businesses with little financial history.
- Check your eligibility
Lenders evaluate applicants based on specific criteria, which your broker will explain in detail:
Business Case: The specific reason you are looking for the loan, how it will impact your business – and the future projections for your business. A well articulated reason for seeking financing will help the lender align the funding structure to your objectives.
Schedule of existing debt: Understanding your current financial commitments helps brokers and lenders assess how the funding fits with your overall obligations as a business.
Understanding of related businesses: Helps your broker understand any potential synergies, risks or opportunities within the wider group structure. The broker then shares this information with lenders to provide a full picture of your commercial operations.
Credit Score: Both your personal and business credit scores are considered and analysed by lenders.
Business Revenue: Lenders will look at your revenue as one of the indicators of your ability to repay the loan.
Cash flow and income: Lenders consider the businesses debt-to-income ratio in order to establish your ability to generate the cash flow to repay the loan.
Collateral: Depending on whether you require a secured or an unsecured loan, lenders will evaluate whether they need to secure the loan with collateral (assets with a residual value to cover the cost if you default).
Time in business: Some lenders will lend to startups, while other lenders will prefer businesses with 1+ years trading.
- Prepare the necessary documentation
To apply for a business loan, you’ll need to provide detailed documentation, which we have listed for you below:
- Business plan
- Financial statements (Profit and loss, balance sheet, management accounts)
- Schedule of existing debt
- Tax returns
- Bank statements
- Proof of collateral (if applicable)
- Understanding of related businesses
- Rationale for application
- Understanding of current trading
Having these documents ready to present to your broker will streamline your loan application process.
Choose the correct broker
Compare brokers to find one that offers support and the best terms for your application. Consider brokers that have a defined process, keep you informed throughout the application, and their level of post-sales support.
- Submit your application
When applying, ensure all supporting documents and forms are complete and accurate. Mistakes here often delay loan approval or lead to rejection. Ensure you’re prepared to answer a number of questions about your business and your plans for the loan.
- Understanding the terms and conditions
Before signing, carefully consider and review the loan agreement. Pay attention to:
- Interest rates (fixed or variable)
- Repayment schedules
- Fees (documentation raising, origination, early repayment etc.)
- The consequences of default
If you’re unsure about any of the terms in the agreement, seek advice from a financial advisor or solicitor who is best placed to recommend which route you take.
Tips for a successful business loan
- Maintain a strong credit score: A strong credit history can gain you access to better rates and terms, however a good credit history does not necessarily guarantee you’ll get approved for the loan.
- Build a strong relationship with your broker: Establishing a sound rapport with your broker can increase your chances of a successful application.
- Seek expert advice: A reputable finance broker can match you with the best loan for your specific business needs.
Final thoughts
Applying for a business loan doesn’t have to be overwhelming. It’s important you understand your options and prepare thoroughly, so you can secure the funding needed to achieve your business goals. If you’re unsure where to start, book a discovery call with Mill Wood to gain valuable guidance.
A well-chosen loan can be a powerful tool for your business, so be selective and use loans wisely to accelerate your business growth.
