How to get a business loan for the first time

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How to get a business loan for the first time - where to start and what type of loan to apply for

If you’re ready for your first business loan, congratulations! You’ve successfully started your own business and are now in the position to grow with the help of the right type of business financing.

Now comes the hard part. Deciding what type of business loan to apply for isn’t straightforward. If you’ve started researching your options already, you’ll already know that there’s a heck of a lot of choice out there.

Choice is good, but confusion isn’t so good. That’s why we’ve put this guide together to help you navigate the business loans market for the first time. We hope it helps you understand your choices a little better and make the decision that allows your business to reach its full potential.

Let’s start with the fundamentals:

How do business loans work?

Taking out a business loan is a financial commitment that can help you to invest in your business. Getting a loan involves borrowing a set amount of money from a bank, building society or specialist business lender and paying it back over a pre-agreed period of time. The amount you borrow can range from £1,000 to hundreds of thousands and repayment periods could be months or years.

There are some alternative sources of business funding that can be suitable in some situations. These might not work in the same way as a business loan, but can be useful for things like balancing out cashflow. These include things like merchant cash advance and invoice financing, both of which we’ll look at in more detail later.

Is it easy to get a small business loan?

Eligibility criteria will change depending on the lender. Banks and building societies, which are more traditional sources of business loans, will usually have stricter lending criteria than smaller, online lenders who will often be more flexible. However, you will usually need to be able to demonstrate that your business has a decent turnover and that you will be able to repay the money borrowed.

As a business owner, your personal credit file, and those of any partners, will usually be examined, along with your business accounts. However, lending criteria will often be more strict for larger amounts repayable over a long period of time. Shorter, smaller loans are usually easier to get.

What can you use a business loan for?

You can use most businesses loans for any purpose you like, providing it is related to your business. However, it’s sensible to be sure in your mind why you need a business loan and what you will use the money for before you borrow.
Some of the common uses for business loans include:

  • Filling gaps in cash flow
  • Meeting unexpected expenses
  • Taking on new staff
  • Moving to larger premises
  • Buying new equipment/machinery
  • Investing in increased manufacturing
  • Buying stock
  • Paying more for marketing and advertising

What are the different types of business loan?

There are a number of different types of business loans to consider. Firstly, business finance falls into one of two categories:

Secured business loans

These are loans that are secured against a business asset, such as a property or a piece of equipment or machinery. They are often used to purchase expensive assets or take the form of commercial mortgages. These loans may have lower interest rates than unsecured loans and could even be easier to get. However, they come with much greater risk for the borrower, as you could stand to lose your asset if you fail to keep up with repayments.

Unsecured business loans

These are business loans that are not secured against an asset. They carry less risk to you as a borrower, but interest rates are higher as a result and loan amounts tend to be smaller, while repayment periods are shorter than for secured loans.
For the purposes of this article, we’ll focus on unsecured business loans. Here are some of the main types of unsecured business loans to consider.

Business bank loans

Business loans from banks are the most traditional source of unsecured business finance and, until a decade ago, they were still one of the only options available to small business owners. Banks and building societies are still very much worth considering when looking into your business funding options. However, since the economic crash of 2007 and some subsequent high profile scandals about how banks treat small businesses, borrowers are far more open to alternative financing than ever before.
Bank loans may offer decent interest rates and terms, and they increasingly provide access to apps and online tools that make them more user friendly. However, eligibility criteria are often very strict and flexibility isn’t something banks are famous for when it comes to business lending. They also often require borrowers to fill out long application forms, have meetings in person or provide lots of paperwork. And even if you are successful, money can take weeks to arrive in your bank account.

Online business loans

A number of online business lenders have appeared on the market over the past few years, offering a more flexible and tailored approach to lending. For example, small businesses can now access financing even if they have only been trading for six months, or if their turnover is still quite low.
Online lenders will often consider borrowers who have less training history and credit history available. They can do so by using new technology that allows them to analyse business finances and accounts to project future performance.
Online lenders can make decisions based on individual cases, as opposed to set-in-stone criteria and adapt loans and repayment terms to suit specific circumstances.
Lines of credit
Lines of credit, or revolving credit facilities as they are also known, are another form of online business finance that provides help for small businesses that suffer from gaps in their cash flow. Lines of credit are loans that work a little like a bank overdraft. You borrow money up to an agreed limit but are only charged interest on your outstanding balance on any given day.

Invoice financing

Invoice financing, also called invoice factoring, involves selling your outstanding, unpaid, invoices to a financier. They will give you the value of the invoice, minus a fee, and will pursue the debt themselves. You get access to the cash owed to you immediately, in exchange for a percentage of that cash.

Peer-to-peer small business loans

These are loans that you can access through an online peer-to-peer lending platform, which matches investors with borrowers. Investors can be institutional investors or individuals who are simply looking for a sensible way to invest cash that might bring them a little more by way of returns than a savings account. Rates and terms can be favourable but lenders will usually want to see some impressive figures and a perfect credit rating before they will consider you.

Where to start when applying for a business loan for the first time

After you’ve established what type of loan you want to get, it’s time to think about applying. To answer the question of how to get a business loan we need to look at the application process itself.

When you apply for a business loan of any kind, there are a few documents you are likely to need. These include:

  • Business accounts
  • Proof of ID and address
  • Business bank statements for the past year or less
  • Details for all company directors

Having a business plan to show your prospective lender may also help in securing a good loan deal. It shows lenders what you plan to do with the money and how it could help you to grow. The business plan should include the loan repayments.

Consider how much time you have. If you need the money as soon as possible, opting for an online business loan is usually much quicker than a bank loan. Many online lenders will transfer your funding to you on the same day that your loan is approved.

How can you increase your chances of getting business funding?

There are a number of different types of business loans to consider. Firstly, business finance falls into one of two categories:

Be clear on why you need the cash

Many business lenders will offer the opportunity to speak to an agent on the phone about your loan needs. A good business loan agent will be well-informed about the ins and outs of running businesses and may be able to talk you through options or even help you understand your choices more clearly.
They may also be very happy to listen to your business story and your professional hopes and dreams. There’s no reason why a lending decision can’t be made based on your business vision, your past experience and your plan for the future, providing it’s been well thought-out and financially viable..

Make sure you have your house in order

Don’t even think about getting started on applying for your dream business loan until you have the documents you need in order and to hand. If your accounts are all over the place, this won’t reflect well on your application. If, however, you can provide well presented documents, such as accounts, bank statements, cash flow forecasts, business balance sheets and other supporting documents, you will be maximising your chances of being accepted.

Use comparison sites

Comparison sites can help you when researching what loan to take out. They keep their ‘league tables’ of the best business finance options up to date and also tend to publish guidance to help you make your choices in the form of articles, blogs and ‘how to’ guides. FAQs can also be really helpful when getting to the nitty gritty of loans and borrowing and what this really means for a small business.

Consider using a broker

Brokers are professionals that know the lending marketplace inside out. They will help you find a suitable business loan option and will also help you apply and get accepted. However, before approaching a broker, try to establish whether they have access to a large number of lenders and how much they charge for their services.

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