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Published on 24th January 2019

How to get a business loan: a 6-step guide

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1. Work out if you’re ready

Not every business is ready for a loan. They’re generally used to:

  • Buy stock
  • Move to a new office
  • Hire staff
  • Pay off debts

If you don’t need a business loan for these reasons, you might be better off looking at alternative sources of business finance.

2. Check your credit score (and your business’s credit score)

When applying for a business loan, lenders will usually check your credit score – both your personal one and your business credit score.

When assessing your credit score, lenders look for:

  • Late payments
  • Missed payments
  • A high debt-to-income ratio
  • Bankruptcies

Business loans for bad credit scores

Even if you have a bad credit score, you can still get a business loan. But they tend to be more expensive.

The minimum requirements vary between lenders. But generally, you need to:

  • Run a profitable business
  • Borrow less than 25% of your annual turnover
  • Have been in business for more than 2 years
  • Have no County Court Judgements on your credit report

3. Get your documents in order

When you take out a business loan, lenders need to see plenty of evidence that you know what you’re doing, and what you plan to do in the future. Before you apply, you should get your documents in order. That includes:

  • A clear, coherent business plan
  • A proposal for the loan – how will this money help you grow your business and make more money?
  • Balance sheets
  • Your credit history

4. Pick a product

Secured vs unsecured business loans

A secured loan uses an asset you own to guarantee that the loan will be repaid. But whatever you use to secure the loan can be taken away from you if you don’t pay your loan back. So be careful before using your house as security.

Secured loans have their benefits. They often come with lower interest rates, because there’s less risk for the lender, and they can be a good option if you (or your business) has a bad credit score.

When you apply for a secured loan, your lender will use your credit score and other financial documents to decide whether to lend you the money.

You can get unsecured loans from banks, building societies and peer-to-peer lenders.

Short-term business loans

Although more expensive, short-term business loans can be taken out to cover costs for just a few days. Ideal if your business only needs a small amount of money for a single expense, but you don’t want to sign up for an annual interest rate.

Peer-to-peer business loans

Peer-to-peer, or P2P loans, are a kind of social lending. You can get P2P loans for any purpose, but they can be a perfectly good option for business in need of cash.

Working capital business loans

Working capital loans are designed to help you pay day-to-day costs – like paying wages – rather than longer-term investments.

You’ll still need to prove you can pay the money back, but it removes the need to create a comprehensive, long-term plan for investing the money you borrow.

Invoice finance business loans

Invoice finance lenders buy your invoices from, freeing up cash for your business without giving you huge interest rates to pay. The amount you receive will be lower than the total value of the invoices, though.

5. Compare lenders

You can get business loans from:

NameMinimum loanMaximum loanMinimum trading timeMinimum turnover
Fleximize
£5,000 £500,000 6 months £5,000 per month
Esme Loans
£10,000 £150,000 18 months £15k per year
Boost Capital £3,000 £500,000 2 years £70,000
Nucleus Commercial Finance
£5,000 £50,000,000 3 years (for basic commercial loan – other products areavailable) “Proven profitability”
Iwoca
£1,000 £200,000 Case-by-case Case-by-case
Funding Circle
£10,000 £500,000 2 years None


6. Consider the alternatives to business loans

Business loans aren’t for everyone. If you need to raise capital, you could also consider:

  • Crowdfunding
  • Raising money through investments
  • Overdrafts
  • Business credit cards

Government start-up loans

Unlike most business lenders, the Government offers start-up loans for business that have been trading for less than a year.

Through the Start Up Loan scheme you can borrow between £500 and £25,000, which you pay back over 5 years.

The scheme includes free mentoring.

If you’ve taken out a business loan, leave us a review and let us know how you found it.

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