Getting a business loan is rarely complicated, but it does reward preparation. Lenders want to see that the money has a clear purpose, that the business can afford the repayments and that the people running it understand their numbers. If you work through the steps below before you apply, you are more likely to be offered finance that genuinely suits your business, and less likely to waste time on applications that were never going to fit.
Step 1: Be clear about what the money is for
Start with the purpose, not the product. Are you buying equipment, covering a gap between paying suppliers and being paid, taking on a larger contract, refurbishing premises or paying a tax bill? The purpose shapes almost everything that follows, including the type of finance, how long it should run and what a lender will want to see.
As a rule, the length of the finance should roughly match the life of what it pays for. A van might suit finance over three to five years. A seasonal stock purchase suits something that can be repaid within months. Funding a short-term need with long-term debt, or the reverse, tends to cause problems later.
Step 2: Work out how much you need and can afford
Borrow what the plan requires, with a sensible buffer, rather than the largest figure you think a lender might approve. Then test affordability honestly. Look at your recent bank statements and management accounts, and work out what a monthly repayment would look like against your typical cash flow, not your best month.
Lenders will do this calculation themselves, so it helps to do it first. If the repayment would stretch the business in a quiet month, consider a smaller amount, a longer term or a different type of finance.
Step 3: Understand the main types of finance
There are many ways for a limited company or LLP to borrow, and each suits different situations:
- Unsecured business loans for general growth or working capital, without a specific asset as security.
- Secured business loans backed by property or other assets, often for larger amounts.
- Asset finance for equipment, machinery and vehicles, secured on the asset itself.
- Invoice finance to release cash tied up in unpaid customer invoices.
- Revolving credit facilities for flexible access to funds you can draw and repay.
- Merchant cash advances, repaid as a share of card takings.
- Commercial mortgages and bridging loans for buying or refinancing property.
- VAT and tax loans to spread the cost of a large HMRC bill.
You don’t need to pick the product yourself. Knowing the broad options simply makes it easier to have a useful conversation with a broker or lender.
Step 4: Check your business is likely to be eligible
Most mainstream and specialist lenders have minimum criteria. Common ones include a minimum trading history, a minimum annual turnover, a UK base and a limited company or LLP structure. Many lenders look for at least six months of trading, and some want two years or more for larger amounts.
Check your credit position too. Look at your business credit file and, as a director, your personal credit file. Correct anything that is wrong and be ready to explain anything that is right but unflattering, such as a past missed payment.
Step 5: Get your documents ready
Having paperwork to hand makes the process faster and shows a lender you are organised. Typically you will need recent business bank statements, your latest filed accounts, up-to-date management accounts for larger amounts, details of existing borrowing and identification for the directors. For property or asset finance, you will also need details of what you are buying.
Step 6: Speak to a specialist or approach lenders
You can apply directly to a lender, but every lender has its own appetite, and an application that suits one may be declined by another. A specialist finance broker works with a panel of lenders and can usually tell you early which ones are likely to consider your business, which can save time and avoid unnecessary credit searches. Ask any broker how they are paid and whether they work with the whole of the market or a selected panel.
Be wary of anyone who guarantees approval before looking at your circumstances, or who asks for a large upfront fee before you have an offer.
Step 7: Compare offers and read the terms
Once you have offers, compare the total cost of borrowing, not only the headline rate. Look at arrangement fees, broker fees, early repayment charges, whether the rate is fixed or variable, what security is required and whether a personal guarantee is needed. Make sure the repayment profile works for your cash flow. If anything in the agreement is unclear, ask, and take independent advice before signing a personal guarantee.
After drawdown, keep to the repayment schedule and keep your lender informed if circumstances change. A good track record makes the next application considerably easier.
This guide is general information, not financial advice. Loanleaf is an introduction service, not a lender or broker, and is not authorised by the FCA. Check the details with your broker or lender before you borrow.