Deciding to take out a loan is a big step for any business, especially for smaller enterprises and start-ups. Whether you need funding to cover any temporary cash-flow shortfalls, or to invest into your business to allow it grow and reach the next level, there are a number of considerations every prospective borrower will need to look at.

Of course, businesses will need to determine exactly how much they want to borrow, but this is only the start of the lending process.

Choosing your lender

Although a high-street bank may be the first loan provider that comes to mind, there are a number of other options that may be able to offer funding better suited to your needs.

You may want to use an online business loan marketplace such as NerdWallet, which is a one-stop-shop for business lending featuring high-street banks such as NatWest and Royal Bank of Scotland or innovators such as Spotcap, Esme and Iwoca.

Alternative lenders

This umbrella term encompasses the variety of challenger banks and fintech lenders, including peer-to-peer platforms, which can now offer competitive loans to businesses. Over the last few years their popularity has risen among businesses looking for extra funding, partly due to schemes such as the Open Banking system. This means businesses can share their financial information digitally with prospective lenders, so enabling lenders to assess and decide on loan applications much quicker than before.

These alternative lending options may be beneficial for a variety of small businesses, including those who have had loan applications rejected by mainstream banks. Banks often have stringent lending criteria and may be reluctant to offer loans to SMEs and start-ups who may be considered more of a risk, which could leave a significant number of people looking for funding elsewhere. This is where these new-style lenders may be able to help, although the interest rates could be slightly higher than those typically offered by banks.

Furthermore, some new-style lenders may give businesses the opportunity to check their eligibility for a loan in minutes. They can do this without performing any credit checks and so without it affecting your credit history.

Banks and brokers

For some businesses, taking out a loan from a bank may be a more suitable option than an alternative lender. Particularly if businesses are looking to borrow a considerable sum of money over a long period of time, banks may be able to offer funding where alternative lenders may not. Banks are also likely to offer competitive rates, especially if the business can offer security against the loan and has a clear business plan showing how they will make the repayments.

If businesses are uncertain about which lender is best suited to their circumstances, even after researching all the possibilities, then they may want to consider a broker. They can offer advice and information to help source a loan for businesses, although it is important to look at how much the broker charges and whether they are limited to finding a loan from a set selection of lenders.

Completing the necessary paperwork

The paperwork that businesses would need to present when applying for a loan may vary according to provider, although there will be some similarities. Of course, if they choose a challenger bank or other alternative lender, these will be submitted online, whereas a high-street bank lender may request physical documents.

All lenders will need to see the financial history and performance of your business. The digital nature of alternative lenders can make this a lot easier and faster for businesses as the lender can access and analyse the relevant information from your accounts online. However, if banks require physical copies, this can be more time-consuming for both the business to bring together and for the bank to process the information.

Some lenders, particularly banks, will also require some form of business plan so they can be sure you will manage to make the repayments. Even though not all lenders may need one to offer a loan, drawing up a business plan will also help you to determine how much you need to borrow and how you will use the money.

Applying for the loan

The time it takes to apply for a business loan and get it approved will depend on the lender you choose. A bank may take weeks to approve a business loan but, if a business uses an alternative lender, the loan could appear in their account within a matter of days or even hours.

Whatever lender you decide to apply to, it is important to make sure that it is the right one for you and your business needs. Although it might be tempting to choose the first provider you find that can offer you a fast loan, it is worth researching other options and making sure it is the most suitable choice for your current situation, and also for the future.

Businesses should carefully consider the terms of each loan agreement, such as any flexibility regarding payment and if you could extend the loan, as this may become significant in a few years.