How to apply for a business loan

Business loans are versatile financial products, able to support a variety of business activities, from purchasing a major asset or supporting R&D, to protecting cash flow or consolidating debt.

It’s no wonder they are often the first financial product a business owner will consider after deciding they need an injection of capital into their business.

In this guide we explain what a business loan is, why you might want one, and some factors to think about before applying.

As with all financial decisions, it’s a good idea to seek independent, specialist advice when deciding what financial products suit your business and its circumstances best.

What is a business loan?

A business loan is a financial tool that can be used to boost your business's growth, acquire new machinery, or navigate through periods of irregular revenue.

Numerous lenders offer business loans, each with their own terms and conditions.

Once you secure such a loan, repayment is typically made in scheduled instalments, inclusive of the principal amount and accrued interest.

This repayment structure allows for predictable budgeting while providing the necessary capital for business operations or expansion.

When applying for a business loan, you will need to tell the lender the intended purpose of the funds.

You will also need to demonstrate your financial capacity to repay the borrowed amount.

The repayment duration of a business loan is flexible.

You can opt for a short, medium, or long-term loan, with repayment periods typically ranging from one month to 25 years.

Moreover, the interest rate of the loan could either be fixed or variable.

A fixed interest rate implies that the repayment amount remains consistent throughout the loan term.

In contrast, a variable interest rate suggests that the rate may fluctuate over time, potentially altering your repayment amount.

Understanding these aspects can guide you in selecting a loan structure that best aligns with your business needs and financial capability.

Some lenders will also require a personal guarantee before approving an application and will have eligibility criteria that you will need to adhere to.

What’s the difference between a secured and unsecured loan?

Business loans can be classified into two main categories: unsecured and secured loans.

Unsecured business loans are a form of credit where the borrower does not need to pledge any of their assets as collateral.

This means the lender relies solely on the borrower's creditworthiness, leading to potentially higher interest rates due to the increased risk.

On the other hand, secured business loans involve the borrower providing an asset as security.

If the loan repayments are not met, the lender has the right to sell the pledged asset to recover their funds.

Consequently, secured loans typically have lower interest rates compared to unsecured loans, as the lender has a guaranteed method of recouping their money if the borrower defaults.

How to apply for a business loan

Before you apply for a loan you could consider the below steps to give yourself the best chance of success.

Deciding how much you need to borrow and what for

When applying for a business loan it’s well worth being ready to explain to a potential lender how you intend to use the funds you're applying for.

If the intended purpose of the funds is general, such as supplementing working capital, it’s worth providing a detailed explanation as to how this will help your business.

Another possible reason to seek a business loan is to consolidate multiple existing business debts into one loan, called debt consolidation.

Before applying for a loan though its imperative that you evaluate both the amount of money your business needs and what it can realistically repay.

Doing so not only demonstrates your financial responsibility during the application review process but also equips you to negotiate loan offers confidently.

To assist you in this process, it’s worth making use of a business loan calculator, which many lending providers have on their website.

This tool helps to provide an overview of potential monthly repayments based on the amount you intend to borrow.

Review your business credit report

When you apply for business financing, your prospective lender will review your credit report when deciding on whether to approve your application.

Therefore, it's crucial to obtain a current copy of your credit report and ensure its accuracy.

Keep in mind that the most advantageous loan terms are usually offered to applicants with strong credit scores.

Before submitting your application, it could be beneficial to investigate strategies for enhancing your credit score.

Read more about your business credit score.

Check your finances

Before applying for business financing, it's advisable to settle any existing business debts.

This not only helps to improve your credit score but also strengthens your loan application.

Additionally, maintaining a healthy cash flow is an essential aspect of your business that lenders consider.

Therefore, if there are any payments due to your business, make sure to collect them.

This will demonstrate to potential lenders that your business has a steady income stream, further bolstering your application's success chances.

Learn more about the importance of cash flow.

Review your accounts

Your prospective lender may need to see your most recent financial statements as part of your loan application process, depending on your specific situation.

Therefore, it's crucial to ensure these documents are accurate and up to date.

If it's been more than two years since you last filed your business accounts, the lender may request new filings.

Within these accounts, you'll be required to include an in-depth Profit & Loss statement.

Moreover, you'll also need to supply your balance sheet.

These documents provide lenders with vital information about your business's financial health and stability, which are key factors in their decision-making process.

Read more about making the most of your business bank account.

How to manage your loan

When assessing various business financing options, it's important to consider not only the interest rates and fees but also the time required to manage each financial product.

For instance, variable rate products may require more oversight compared to fixed rate ones due to their fluctuating nature of the repayments.

Additionally, some lenders might request annual reports or periodic check-ins, which could consume valuable time that could otherwise be spent on revenue-generating activities.

Therefore, understanding these factors is crucial in choosing the most suitable and manageable financing option for your business.

How much can I borrow with a business loan?

Typically, businesses can draw down anywhere from £500 to £15 million when taking out a business loan.

This, however, is dependent upon several factors such as your business's current financial status and credit score.

The type of business loan you opt for and the term length you choose will also influence the amount you can borrow.

Before finalising a loan, it's crucial to ensure that you can comfortably manage the repayments.

It’s also a good idea to have a contingency plan in place to handle any unexpected changes in your financial situation.

How long can I spread loan repayments out for?

The duration for repaying a business loan is determined by your business's financial health and needs.

Long-term loans typically feature lower monthly repayments and interest rates, making them more manageable on a month-to-month basis.

However, the extended repayment period means you'll end up paying more in interest over the life of the loan.

Additionally, longer-term loans might limit your monthly cash flow, as a portion of your revenue will be consistently allocated towards loan repayment.

Obtaining approval for long-term loans can also be more challenging due to the increased risk associated with a longer repayment period.

Lenders may perceive a higher likelihood of changes in your financial situation that could impact your ability to repay the loan.

Therefore, it's important to carefully assess your business's financial capacity and stability before choosing a loan term.

What documents will I need to apply for a business loan?

When applying for a business loan, lenders will require specific information to evaluate your eligibility.

Firstly, they'll need to understand the loan amount you're seeking and its intended usage.

To facilitate an accurate assessment, you will need to produce a variety of documents to support your application.

However, bear in mind that the required documentation can vary from one lender to another.

Documents you might need to provide include:

• Business bank statements: These reflect your business's financial transactions and cash flow.
• Financial accounts: These give an overview of your business's financial health.
• Business tax returns: These show your business's income, deductions, tax liability and payment history.
• Personal tax returns: These may be required, especially for small businesses, to assess the owners' financial stability.
• Legal documents: These could include incorporation documents, business licenses, or contracts.
• Proof of address and ID for the business owners: This verifies the identity and location of the business owners.
• Evidence of any other finance: This could include leases, loans, or lines of credit.
• Details of assets: If you're considering a secured loan, you'll need to provide details of the assets that could serve as collateral.
• A business plan: This outlines your business strategy, market analysis, and financial projections.
• Financial forecasts: These provide an estimate of future revenues and expenses.
• Balance sheets: These offer a snapshot of your business's financial status at a given point in time.

By gathering these documents ahead of time, you can speed up the loan application process and could increase your chances of approval.