Many, new business owners rely on business loans to kick off their entrepreneurial journey.
A loan can sound terrifying to a new business owner, but they don’t have to be as long as you do the research and you’re careful about how much you borrow. If you’ve been looking to start a business this year, then a business loan may be required.
In this guide, you get all the information you need to apply for a business loan, whether that’s short-term or long-term.
How to Apply for a Business Loan in the UK
Applying for a business loan will require you to meet the criteria that the lender is looking for. It’s easy to apply for a business loan and usually involves an application process that’s easy to fill out and submit.
What documents will I need to apply for a business loan?
Most lenders will expect around a year’s worth of personal and business bank account statements depending on what type of loan you’re going for. Some lenders may require more or less. For good practice when applying for finance, it’s worth having all this information readily available ahead of time.
Of course, basic information like your business name, contact details, etc., is also required.
What Are the Different Types of Business Loans Available in the UK?
It’s likely surprising to many that there are a variety of business loan types to choose from when it comes to financing.
There are eleven different types of financing available below that we will go into with a little more detail.
Short-term loans
Short-term loans are for those who need a quick financial cash boost but don’t want long-term repayments. A short-term loan is typically offered over a few weeks or months, with the borrowing capacity varying from lender to lender. Some may offer upwards of £50,000, £100,000, and even £200,000 in short-term business loans.
With short-term business loans, it’s important to remember that these loans do tend to have higher interest rates than other financing options available. This is something to consider when it comes to the amount you borrow.
Long-term loans
Long-term loans are just like short-term loans, only they’re repaid over a longer period. They usually have lower interest rates, making them more appealing for those who want to avoid the high rates offered with short-term financing.
There are many providers of long-term loans as this can be where a lot of the money can be made for lenders. You may find more options to choose from when picking your financing from this category.
Variable loans
Variable loans or variable-rate mortgages have interest rate options that vary from one to the other. These rates will often move up or down, depending on the state of the UK economy. Three different types of variable-rate mortgages are used. These are standard variable rate (SVR), tracker, and discount rate.
The one you pick will depend on a number of factors, perhaps how much you’re borrowing and over what period of time.
Fixed-rate loans
Many businesses will choose a fixed-rate loan or mortgage where the interest remains the same throughout the term of the loan. The duration of the loan remains the same until you change lenders, where applicable.
This has its benefits as the fixed rate is set, so you know exactly what you’ll be paying each month. However, if the interest rates go down, it does mean that you may miss out on savings you could have made. That is the risk that you take with fixed-rate loans, though.
Working capital loans
Working capital loans are useful when you lack the capital required to fund your business and its everyday operations. This can be anything from purchasing supplies to paying your employees’ wages. Whilst most organisations would like to have a healthy cash flow, business life doesn’t always pan out that way.
These loans are flexible, and for small business loans, they’re great if you’re after some quick cash. However, the mistake often made regarding working capital loans is that they are long-term funding options. That’s simply not the case.
Commercial mortgages
Commercial mortgages typically take over business loans. They’re commonly used for more significant amounts of money, usually lasting between three to twenty-five years. You’ll usually have a 70-75% mortgage loan with this type of financing.
Equity finance
Equity finance is where you’re happy to sell off your business as shares in order to gain access to additional capital. It’s suitable for those who are welcome to investors giving their advice and influence in running the business. Not so much, though, if you want to run the company your way.
Asset financing
Asset financing will use the company’s balance sheet assets to borrow money or qualify for a loan. The company borrowing the funds will require security interest when it comes to the assets.
Invoice financing
Invoice financing can be worthwhile when you have a lot of incoming invoices that haven’t been paid yet, damaging your cash flow.
It works by the lender providing you with the invoiced amount and then collecting the payment and a fee once the invoice has cleared.
Government loans
Government loans are some of the most appealing because chances are, you won’t need to pay them back. They’re great for those looking to start a business but are limited to what they can generate in capital themselves.
Government grants are usually given to those who have innovative business ideas or operate within specific industries.
Start-up business loans
These business loans are for start-ups only. They’re suitable for small businesses that need a helping hand during one of the most vulnerable times for the organisation.
Most lenders will allow you to borrow up to £25,000 to help you get the right footing for your business when you’re just starting out.
Does My Business Qualify for a Loan?
With so many different business loans to choose from, there are a lot of lenders that are willing to give their money to those of all backgrounds. When it comes to qualifying for a business loan, there are some basic criteria that you must meet.
To help better your chances of qualifying, here are a few things to do before applying:
- Build up your credit score to better your chances of getting the choice of many lenders.
- Know each of the lender’s minimum requirements and criteria. Each lender will likely be a bit different.
- Gather financial and legal documents that the lenders will require.
- Develop a strong business plan if you’re looking for business expansion loans or your business hasn’t launched yet.
When it comes to applying, the more prepared you are with your documentation, the better.
The Pros and Cons of Business Loans
If you’ve never applied for a loan before, chances are you’re a bit unsure as to whether it’s the right move for you. There will always be horror stories of those who’ve taken a loan out and not been able to pay it back. It happens.
However, one person’s misfortune shouldn’t be the reason why you don’t take out a business loan. With that said, here are some pros and cons of business loans to help weigh up your decision.
Pros:
- Lenders aren’t entitled to your profits; it’s only the debt repayments they’re interested in getting back.
- Lenders review your business plan to ensure that the funds are being used appropriately and that you can pay back the money.
- Business loans predominantly have low interest rates in relation to other funding options like a credit card, for example.
- Interest payments made on the business loan are tax-deductible, saving you some money from the taxman!
- Money can be available immediately and can also help towards boosting your credit rating.
Cons:
- There can sometimes be strict guidelines set that require you to provide more information or documents as evidence.
- Some of the lender review processes can be lengthy and take time.
- A lot of lenders won’t look at your application if your credit rating is below a certain number.
- Most commercial companies will require you to provide collateral that incorporates more risk.
- Bank loans belong to the bank, and that can be a liability. This can, at the time, devalue your business.
What Can I Use a Business Loan for?
You can use a business loan for pretty much anything and everything. What you spend it on will depend on what type of business loan you choose. For any short-term loans and working capital loans, for example, you may want to pay suppliers for services and buy new equipment for the workplace.
For long-term loans, it might be to invest in recruitment to expand your business. It may be adding on an extension or purchasing an additional property. There are many ways you can utilise a business loan, so it’s worth exploring the notion of borrowing.
What Are the Costs of a Business Loan in the UK?
The costs of a business loan will often change from one lender to another. Some have higher interest rates, like the short term financing solutions, and others will have late fee payments or early exit charges.
Repayment terms will be agreed upon by accepting the offer of the loan. These repayment terms will depend on the amount you borrow and various other factors that the lender feels are important.
How Soon Can I Expect to Recieve My Business Funding?
The timeline in which you’ll receive business funding depends on several factors, from the type of loan to the lender you pick. Some offer the loan and then make the payment into your account within 24 hours, whereas others might take days or weeks to process the payment.
Can I Get a Business Loan If I Have a Bad Credit Rating?
If you have a bad credit rating, then you’re going to be limiting yourself to what you can borrow. Some business loan providers will offer you secured business loans and unsecured loans, despite your credit score. However, this may be limited.
Whilst it’s not impossible, having a bad credit rating can make obtaining financing more challenging. It also means you’re likely to pay more back over time due to high interest rates.
Do All Business Loans Require a Personal Guarantee?
Not all business loans require a personal guarantee. However, those unsecured business loans may require this personal guarantee instead of asking for collateral as security. Ultimately, a personal guarantee is very much the same, if not riskier, for you.
This is a guarantee you make that you’ll cover the repayments, whether that’s through your own back pocket or via your business assets.
Do Business Loans Require Security?
Not all business loans require security, but some do. Secured loans will need collateral, often in the form of business assets, which is your security against the loan. Some lenders will offer a range of financing options, and they’ll inform you as to whether or not they need security to provide you with the money.
Are There Business Loans for Female Entrepreneurs?
Female-led start-ups are a minority within the UK. Just over a third (37%) of new businesses are launched by women. With that being said, a range of business loan providers are great for female entrepreneurs. Here are a couple to get you started!
How to Choose the Right Business Loan Lender for Your Business
When choosing the right lender for your business, think about what you require for your business in question. Consider all the requirements, and then find a lender that’s best suited for you.
After all, it’s a two-way relationship with the lender. You need to be happy and financially confident with the lender you choose to borrow from.
Most Common Business Loan Providers in the UK
There are some common business loan providers that are worth checking out if you’re looking for reputable and trustworthy options.
For high-street banks, some greats suggestions are:
There are plenty of popular mainstream independent lenders that are worth taking a look at too. These include:
There are many options to pick from, so it’s good to do the research and explore the market, perhaps with a broker for independent advice.
Final Thoughts
A business loan is a great way to help fund and kickstart your business, help it through tough times and expand it to new horizons. Of course, it’s always good to do your research and to make sure that the small business loans you choose are suitable for your needs.
FAQs
How much can I borrow with a business loan in the UK?
The amount that you borrow will depend on the lender. For business loans that are accessible in the UK, you can expect to borrow as much as £2o million. It’s down to your borrowing power and a variety of other factors that are considered when applying for a loan.
It’s essential to think about how much you can afford to borrow, as that’s where business loans and loans, in general, can be risky. Even though the lender believes you can make repayments, you should make sure your cash flow allows for these repayments to be made.
What is the difference between a secured and unsecured business loan?
Secured and unsecured loans are both beneficial for businesses to use. However, secured business loans require you to put down collateral as security. This collateral could be anything from property to various other financial assets.
Unsecured business loans don’t require collateral to be put down as security. Choosing between the two can depend on what options you’re given based on your borrowing ability. You may be able to access both these types of business finance, or you may only be limited to one.
Assess your situation and whether a secured business loan is a better option than an unsecured one.
Are business loans regulated?
Business loans are regulated by the Financial Conduct Authority. The FCA helps to protect both parties from any illegal activities. However, not all business loans are FCA regulated because it’s not a requirement for all types of lending.
For example, if you’re looking at invoice financing, you don’t need to be with a regulated lender for that. However, it’s always good to have a lender who is FCA approved. It helps provide a bit more security and safety as a borrower.
Will I need a business bank account to get a business loan?
To get a business loan, you will need a business bank account. It helps your business to build up a credit history. This makes getting a loan easier when you have a good credit rating. Most banks and lenders will require you to have a business account for business lending.