Thanks to the rise of alternative finance, small businesses are now spoilt for choice when it comes to applying for a business loan. However, with so many options out there, it can be difficult to know where to start, leading some business owners to accept the first offer that comes their way.
To ensure you end up with a loan that works for your business, there’s more to consider than the amount you need to borrow. Here are some of the key things to ask before applying.
How much will it cost?
Unfortunately, there’s no such thing as a free loan, but there’s plenty that business owners can do to ensure they get the best possible deal on a line of funding.
As with any product or service, it can really pay to shop around when applying for a business loan. Comparison sites such as MoneySupermarket and money.co.uk have dedicated sections for business finance, and will save you the effort of trawling the internet for the best deal. Other sites can help connect businesses with alternative providers when they’ve been turned down by a bank or require a speedier route to funding. Part of the government’s bank referral scheme, which was launched in November 2016, Funding Options, Funding Xchange and Business Finance Compared will source quotes from a range of lenders, based on a company’s specific requirements.
While it can be tempting to lean towards the lender with the lowest rates when applying for a business loan, bear in mind that they might charge an arrangement fee, which will either be payable upfront or absorbed into the total cost of the loan. Such fees aren’t always advertised online, so make sure you ask about any additional costs prior to signing on the dotted line.
The actual price, or rate, that you pay for a loan can also be presented in various ways. Whereas some lenders quote a monthly interest rate, others base their quotes on less conventional rates such as factor rate or yield. If you find yourself with a number of quotes that are based on different rates, consider using an online tool that can help you compare the cost of borrowing.
Ultimately, the rate you’re offered will reflect the financial health of your business and its ability to repay the loan. If there are anomalies in your credit history, or you can’t offer security on the loan, you might find it harder to get a low rate. That being said, if you have reasonable explanations for any missed payments or CCJS, and can demonstrate a healthy revenue stream, it might help lower the cost of borrowing.
How long can I borrow for?
Before applying for a business loan, you need to decide how long you need it for. If you’re just looking to bridge a temporary cash flow gap, a short-term business loan might be more convenient, but if you’re seeking a larger amount of capital, you may wish to pay it off over a longer period of time, with lower monthly repayments.
If you know how much working capital is in your business each month, you should be able to calculate an affordable monthly repayment sum, as well as a maximum term. Most lenders will base their terms on a percentage of monthly income, but this can vary wildly, so it’s worth doing your research – and calculations – to ensure your preferred term is agreeable to both you and the lender.
With the majority of longer-term loans requiring security, you also need to consider whether you have any company assets that could be used to secure the funding. If not, you may need to revise down your preferred term and funding amount.
While some lenders have a minimum and maximum term, others are more flexible, offering the choice of fixed monthly repayments or basing repayments on a company’s revenue. The latter option is a good solution for seasonal businesses with peaks and troughs in their sales patterns, allowing them to repay less in slower months and more when sales are higher. Rather than tying a business into a fixed term, a lender will simply collect a percentage of its monthly revenue until the loan is paid off in full.
The important thing to note is that shorter-term loans tend to come with higher interest rates, which can be particularly costly in the event of late payment. On the other hand, a longer term usually means a higher overall cost of borrowing, albeit with a lower monthly interest rate. However, certain lenders will let companies pay off their loan early at no extra cost, only charging interest on the time that they had the loan. This can be beneficial to businesses that are tied into a long-term loan, but find themselves in a position where they can afford to clear their debt ahead of time.
When will I get the money?
Alternative lenders can typically deposit funds in a couple of days; taking applications online and giving businesses an instant indication of their eligibility for funding. In comparison, it can often take weeks to organise a meeting with the bank, only to be told that your business doesn’t fit its lending criteria.
Of course, if your need for funding isn’t that urgent, you might be happy to wait, especially if it means getting a loan on preferential rates. However, speed is usually of the essence for small businesses that don’t always have the cash available to take advantage of important opportunities.
Here at Fleximize, we regularly see companies applying for a business loan that need to pay their suppliers, or secure a new contact, but are waiting on a few payments to free up the necessary cash. More often than not, this isn’t the fault of the business, so as long as we’re confident in a company’s ability to repay, we’ll endeavour to fund them in the space of 48 hours.
To make the process even smoother, it’s worth having a couple of key documents to hand before applying for a business loan. At a minimum, you’ll need to provide your last three months’ bank statements and latest filed accounts. Some lenders might also ask for your sales figures from the past 12 months, or VAT returns if you’re a VAT-registered company.
What security is required?
If your business has any assets that can be used to ‘secure’ a loan, it might allow you to borrow a larger amount, and on lower rates. Ultimately, there’s less risk for a lender if it knows it can reclaim its money, making it more likely to offer preferential terms.
The assets that lenders ask for can vary, but they will generally be fixed assets such as commercial property, vehicles and machinery. If you don’t have much in the way of fixed assets, but take payments via invoice, there are a number of companies that will lend against your unpaid invoices, and collect a percentage of the amount due in return.
As well as securing the loan with company collateral, some lenders might also ask for a personal guarantee, which ties the personal assets of the business’ director(s) to the loan. The majority of unsecured loans will also require a personal guarantee, giving the lender some protection if a business enters insolvency.
Is the service any good?
Even if a lender can deposit funds in the space of a day, that doesn’t necessarily translate into good customer service. Ideally, you’ll be looking for a company that understands your business, gives honest answers to all your questions, and offers a friendly, professional service at all stages of the application process.
This extends to your relationship with the lender during the term of a loan. For example, will there always be somebody on hand if you need to discuss, or revise, your repayment plan? Are they flexible when it comes to changing your payment date? How lenient will they be if you’re a couple of days late with a payment? You can ask all of these questions prior to applying.
Customer review sites like Trustpilot are also a useful port of call if you’re looking for impartial comments on a lender’s service. Alternatively, you could search for case studies or customer testimonials on the lenders’ websites.
Peter Tuvey is co-founder and managing partner of Fleximize.