Securing finance is often one of the biggest challenges a start-up business will encounter.

We caught up with Richard Bearman, the managing director of Start Up Loans, to find out where you should begin.

What can start-up business owners do to improve their chances of securing a business loan?

Securing a loan is often crucial to the success of any new business, and I’m often asked what people can do to increase their chances of getting one.

First and foremost, it’s important to have a clear and sensible business plan. This may sound obvious, but you’d be surprised how often business plans are overlooked, as businesses rush ahead to get their idea off the ground.

While it may seem like an unnecessary piece of work for the person setting up the business, business plans provide all the information that a potential lender needs in order to gauge the prospects of the business. It doesn’t matter whether someone is applying to an alternative lender or to a lender such as a retail bank, it’s vital that they present a clear, realistic and sensible business plan to convince the funder that their business is worth investing in.

What common mistakes do start-ups make and how can these be avoided?

Speed is often seen as a key priority when starting a business and, in some instances, it’s true that decisions have to be made quickly and decisively. However, it often becomes counter-productive if people do things in a hurry, without careful planning or forethought.

When launching a business, it’s worth spending some time putting together a checklist of all the activities that you must do to get your business off the ground. This will ensure that nothing is overlooked. We also advise all aspiring business owners to do the following:

• The business idea: Spend time honing the business idea. If it’s not well thought out and has not been stress tested by those who believe in it, it is unlikely to be viewed positively by a finance provider.
• Assess your situation: It may sound obvious but understanding and being aware of what commitments will be involved in running your business will involve is crucial. Without being aware of this side of things, situations can become overwhelming very quickly.
• Research your business and the market: Knowing who your competitors and customers are should be one of your first steps. You’ll need to find a way to differentiate yourself from the competitors and a way to communicate effectively with your customers.
• Register your business: Whether you set up as a sole trader, partnership, a limited company or limited liability partnership, there is a structure and set-up that is right and best for your business. Do your research and find the right one.
• Get business advice: Seek this everywhere. Be it online or via a mentor, there is nothing quite like insight from someone who has been there and done it before.

What do they need to prepare before they apply?

We recommend that a business plan covers the first five years of someone’s business and includes their strategy, marketing plan and cash flow forecast.

Planning like this enables business owners to understand business assumptions: how many customers they’ll need, how much they need to charge, and how much the business will grow. These assumptions can be tested when researching the market to check they hold water.

In their business plan, people should describe the market and target audience, and outline their competition. Planning their pricing, production costs, marketing and advertising spend will help to predict profits and help inform cash flow forecasts. This kind of information will help to reassure potential funders that the business is likely to succeed and the person setting it up is committed to the project.

Do you need to have a certain credit rating to apply for a business loan?

People applying for a loan from a traditional provider such as a bank will often be turned down for a loan if they have a poor credit rating. This is not necessarily the case for all providers. Check their conditions before you apply.

Your provider may review your past financial behaviours and current ability to afford the loan. This means that there are certain factors which will prevent people securing a loan, such as if a person is filing for bankruptcy.

Where can start-ups find extra help in applying for a loan?

We recommend finding a mentor, whether it be a family friend who has started a business, or someone provided by a third party. Mentors will give businesses objective advice and call out any mistakes or assumptions that may have been made.

Mentors have been there before and will no doubt have experience of mistakes, so they know the pitfalls and can help people to avoid them.

Recent research by Start Up Loans found that more than two-thirds of loan recipients who received mentoring agreed that mentoring support had a positive impact on their business and helped them acquire or improve their business skills (66pc).

Which common terms, conditions and restrictions do start-up owners need to be aware of?

It is always important to ensure you read all the loan and supporting documentation and understand your responsibilities. For anything you are unsure about, it’s best to seek legal advice or help.

Probably the most emotive condition when seeking finance as a limited company is a request for a personal guarantee. Legal advice should be sought if there is any lack of understanding, but in effect this means that the signatory of the guarantee makes themselves liable for the amount of debt the company has borrowed up to the amount mentioned in the guarantee.

Still stuck? Have a look at The best small business loans in the UK.

Looking for finance? SmallBusiness.co.uk is working in partnership with trusted lenders to find the best business funding deals. Find out more here.