How to get a business loan in 5 steps

Follow this 5-step plan if you want to secure a loan for your small business. There is a wealth of high-street banks and alternative SME lenders to choose from.

Running a successful small business requires healthy cash flow, sustainable growth, adaptability, and forward-planning. Naturally this may mean you require an extra injection of cash from time to time.

Business loans are one of the most common sources of finance for SMEs and with the growth in alternative finance providers, such as Capify, over the past decade, there are now loans designed to cover the specific needs of almost every organisation, no matter what shape or size.

Whether you want to hire more staff, ease cash flow issues, renovate your premises or even invest in new equipment, a business loan may be the right option for you. But where do you start?

In this guide we share our top tips on how to get a business loan, and the five key steps you should take to get the type of loan you really need. These include:

  1. Creating a business plan
  2. How to research available lenders
  3. Determining your chances of getting approved (Eligibility)
  4. Making sure you have all the necessary documents
  5. Reviewing the proposed loan carefully

But first, let’s look a bit further into small business loans and the things that business owners looking for finance need to be aware of.

What is a small business loan, and how does it work?

A small business loan is designed to give SMEs access to finance to invest in their business, whether that’s to fund a growth project or simply to boost cash flow. It means a sum of money provided by a lender, which is paid back, plus interest, over a set period of time.

Small business loans differ from other loans because they are tailored around the specific needs of smaller businesses. The specifics of the loan, including the size of the loan, the total amount repayable, repayment period and eligibility, will differ from one lender to the next and will depend on the type of loan you take out.

Therefore, choosing the right loan for your company requires careful thought and planning, and will depend on your ambitions as a business owner or manager, as well as the sector you operate in.

Funding is available from a range of different sources including:

  • The UK government
  • Local government or regional authorities
  • Community Development Finance Institutions (CDFIs)
  • Banks or credit unions
  • Finance brokers
  • Peer-to-peer lenders (P2P or ‘crowdlending’)
  • as well as through alternative finance specialists.

While the lender and business will differ, there are some important steps every business can take to help get a small business loan.

To be in with the best chance of securing a loan for your small business, check out our five steps below.

#1 – Create or update your business plan, and decide what loan you need

While the banks and traditional lenders may require the submission of a business plan and formal interview, many of the alternative lenders only require you to complete a simple online application.

However, the creation of a business plan shouldn’t be underestimated and can be used to help you plan ahead, understand your competition, and target your customers more effectively, as well as acting as a good benchmark for whether you are on track for success.

Before starting your search for a lender, you need to decide the purpose of the loan; is it to help manage the cashflow of the business or is it for a more specific purpose such as funding a new piece of equipment? Some loans can be used for multiple purposes, while others are only for specific situations.

Therefore, it’s important you consider what you plan to use your loan for and how much you need to borrow. This will determine if you need a short term or long-term loan, and whether you need the loan to be secured or unsecured.

#2 – Compare and research small business lenders

With such a wide range of small business loans and providers to choose from, before you begin the application for your loan you need to consider the lender. Doing this will ensure you have all the information you need in order to select the right loan for your business.

Top Tip: If you apply for a loan and are unsuccessful this can negatively impact your business credit score, so researching the lender, and its eligibility criteria, is an important first step

Here are some simple questions to ask yourself to help you choose the right lender for your small business:

  • Look at the terms of the loan: work out how much will you have to repay by looking at the total amount payable
  • Look at the repayment frequency: will they expect you to repay, daily, weekly, or monthly – the more frequent the payments, the more manageable they could be for your business, and this could have a positive effect on your cashflow
  • Check out their customer service: How quickly can you get the funds into your bank account? Can you get them on the phone when you need them? Are they good at explaining terminology and answering your questions? Do they provide any resources that help you run your business, such as useful business articles?
  • Establish if you can raise finance with them again: If they’re good to work with, you might want to apply for another loan in the future or extend your current loan, so look and see if this is an option.

Find finance: is working in partnership with Finpoint to help you find the best finance deals. If you’re looking for fast funding for your business, complete this quick application to access the UK’s largest panel of business lenders.

#3 – Determine your eligibility

Now you’ve identified some potential lenders, you need to determine whether you meet their criteria, and how likely you will be to be approved. As with any loan, there are certain requirements you will need to satisfy lenders, and often this will vary depending on the amount you are applying for, and the loan provider.

While each lender is different and there is no “set standard” there are a number of factors they are likely to consider, which you should always bear in mind before you consider taking out a loan, these include:

  • Your credit score and repayment history
  • Trading history
  • Affordability
  • Business turnover and profitability
  • Business assets and security

Top Tip: Any business owner can easily check their credit score online but be aware that it can vary slightly depending on which website you use. Some of the best-known sites are Experian, CreditSafe or Equifax

Some lenders will offer you a “soft search” approval that will give you a good indication of whether you will be approved for a loan, without impacting your credit score. As an example, to be eligible for a Capify Small Business Loan, you’ll need to:

  • Be a UK limited company or limited partnership
  • Process more than £10,000 a month through your business bank account
  • Have at least 12 months’ trading records

#4 – Have all your paperwork ready

Before you apply for your loan, it’s a good idea to make sure you have all the required documentation and paperwork to hand. Any mistakes or missing information may delay your loan application.

Traditional lenders, including most banks, will often have stricter requirements, while alternative lenders such as Capify are generally more flexible and applications can often be completed online in a matter of minutes.

You can always check with the lender beforehand, but as a rule, they could ask for the following information:

  • Personal details such as names and address of your business
  • Photo ID
  • Business plan
  • Business and personal tax returns
  • Business and personal bank statements
  • Business financial statements
  • Business legal documents (e.g., articles of incorporation, commercial lease, franchise agreement, etc.)

#5 – Understand the terms of the proposed loan

Once you’ve been approved for a loan, the lender will send you the final terms of the proposed loan. If you have applied for more than one business loan, now is the time to compare and decide which is going to be best for your business.

It’s important that the terms make sense for your business, and so make sure you take a close look at, the length of the loan, the frequency of payment and total amount repayable for each. Before you accept the loan terms, you should consider the following:

  • How quickly can I get the cash?
  • Frequency of repayments
  • What’s the total amount repayable?
  • Are the rates fixed or variable?
  • Are there any additional fees to consider? (e.g., underwriting fees)
  • Are there any limitations on the loan?
  • Does the loan require any security?
  • Can you repay the loan early? If so, are there additional costs for doing this?
  • What happens if you are late or miss a repayment?

Once you’re happy with the terms and confident that it’s the right loan for you, it’s time to accept the offer. Some alternative lenders can have the cash in your bank account in a matter of days, or quicker, but remember to check this with your lender.

Further resources

Best small business loans in the UK – Demystifying the process and showing you some of the best small business loans around.

Fast business funding and loans – For small businesses in need an immediate cash injection, short-term loans can offer a ready-made solutions. Here we explore the ins and outs of this kind of SME finance as well as provide a list of some of the main UK providers.

Getting small business loans with bad credit – Where can you turn to if your company has a poor credit profile?

List of UK peer-to-peer lending companies – Updated quarterly.

Responsible Finance – The membership body of the Community Development Finance Association. It also has a list of ‘responsible lenders’ which you can access here: Finding Finance.

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Tim Adler

Tim Adler is group editor of Small Business, Growth Business and Information Age. He is a former commissioning editor at the Daily Telegraph, who has written for the Financial Times, The Times and the...

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