How to apply for a business loan
If you're thinking of applying for a bank loan, forget all the
doom and gloom. There's a fundamental principle to remember: banks
still want to lend money to viable businesses. If you can
demonstrate your business can generate enough profit to prosper and
then pay them back, you're good to go. The challenge is to prove
you fit the bill: this can be difficult if you have no track
record to point to.
This guide explains the dos and don'ts of applying for a
business loan.
Are you ready?
- Whether you're a start-up or not make sure your business
is ready for investment.
- Ensure you have reached the point where to expand your business
- or to get it wholly off the ground - the logical
option is to bring investment in from outside.
- Don't wait until you're in a bad spot and
desperately need finance before you apply: the average lead time is
three to six months.
Before you approach the bank
What to do first
- Prepare to outline in your pitch exactly how much money you
need and how you will spend it. You need to be able to
demonstrate how this cash injection will benefit your
business.
- You'll need to present a credible business
plan and be able to speak in depth about your business's
commercial offering
- If you feel you need help on your business plan, you might
consider consulting a business adviser.
- Be ready to provide monthly cash flow projections
for the next four quarters to demonstrate you can comfortably meet
interest and loan payments. Include a 'repayments' figure in your
calculations.
- Know all details regarding the activities of the
company: the more you're asking for, the more detail you'll be
expected to give
- Get ready to detail any market research you have carried
out
You have to show the bank that you have great people on your team
with the right balance of skills and experience, so get ready to
convince the bank you're the real deal.
- Be energetic and enthusiastic; but be honest too.
You can mention weaknesses as well as strengths in your pitch. The
bank will need a true picture of your business.
- Have all documents to hand so that you are able to
furnish the bank with up-to-date personal and business financial
histories: you'll need to provide an acceptable credit score or
personal reference, and to go through your latest accounts, tax
returns, assets and liability statements
What to expect
- There are three questions the bank will ask:
- How much money you need; i.e. do you need to borrow the full
amount or do you have a deposit?
- Over what length of time do you want to repay your loan?
- Can you secure the debt against any assets?
- The answer to these questions will influence whether your
application is accepted as well as determining the rate and cost of
your interest: so get your figures ready
- The larger your business loan, the more detail you will have to
provide
Types of loan available
- High street banks, building societies, specialist lenders and
internet brokers offer loans tailored to the needs of small
businesses. There are two main kinds of small business loan:
- Flexible loans are tailored to your business
needs, and may allow a capped or variable interest rate and
a choice of monthly or quarterly repayments
- Fixed loans have a pre-determined rate of interest
and a more rigid repayment structure
- The interest rate offered on your loan will vary
depending on fluctuations of the base rate, on the duration of your
loan and on the risk involved. Rates generally range from around 8%
to 12%
- Depending on the size of your loan - small business loans
generally range from £1,000 to £25,000 over an average of one to 10
or even 15 years - you may or may not have to provide
security.
- Unsecured loans usually have higher rates of interest and tend
to provide smaller sums of money over a short period of time
- For larger loans, a bank will want to secure the loan against
an asset such as a business property, or it will require personal
guarantees - on personal homes, for instance - from company
directors
- You can ask to limit the scope and duration of your personal
guarantee i.e. you can be released from personal guarantee once
cashflow reaches a certain level, or after a set period of
time
- Depending on the asset you are using for security - freehold
and long lease property is the most valuable -- the bank will
usually lend 50% - 80% of a property's value. Specialist lenders
may advance as much as 90%
- Beyond this, loans are differentiated by size and
term
- Short term loans are usually smaller and repaid within one
year
- Longer term loans are those which take longer than one year to
settle - and can take as long as 20 years to mature, like
mortgages.
- Credit cards, lines of credit and letters of credit are
also worth considering, depending on your circumstances
- Remember: sole traders and partners are automatically
liable for their company's debts
Be realistic
- Be prepared to wait a little before your loan is
approved: the average lead time is three to six months
- Don't underestimate how much money you will need.
If you need to return to the bank and request further funds, it
will be more expensive. It may also affect the lender's confidence
in your ability to manage your company finances.
- Don't over-forecast revenues or under-value the
costs you will incur.
- Be honest about any reasonable living costs you
will need to take out of the business.
Do your homework
- It's a good idea to ask the bank to calculate the total
cost of your loan offer, including the total cost of
interest and all charges: this will make it easier to compare
different offers
- Be sure to check around and compare different
banks and their small business offerings. Your bank may be
willing to improve its offer if you have other quotes.
- Many banks prefer if you have your main account with them, but
if you do not hold an account with them it will not necessarily
count against you.
- Check for hidden charges:
- You can be charged for simply setting up a loan agreement with
the bank
- Ask about late payment charges
- Redemption penalties can apply if you choose to settle your
loan earlier than agreed
- 'Add on' fees: ask your bank if these could apply to you
Checklist
- Have you gathered sufficient evidence to prove you can generate
profit and make repayments on time?
- Ensure you can outline what you need money for and how you will
pay it back
- Identify clear routes to market and when you expect to start
bringing money in
- It's crucial you have a contingency plan so you can repay your
debts even if things go wrong
FAQ
What percentage of the loan do I have to
match?
You can be asked to match the entirety of the amount you want to
borrow. If you can offer security, the capital investment you are
asked to put forward may be smaller.
How long will it take for the loan to be
approved?
The average lead time is three to six months.
What is the average interest rate for a small business
loan?
Rates generally range from 8% to 12%: the interest rate offered on
your loan will vary depending on fluctuations of the base rate, on
the duration of your loan and on the risk involved
Jargon buster
APR: Annual Percentage Rate: the interest rate for
a whole year. Will help you determine the full cost of a loan.
Credit rating: the rating used to determine how
worthy of credit prospective lenders are.
Freehold: a property where ownership covers both
the building and the land on which it is built
Resources
Smarta Business Builder
To help you on your business journey, we've
created Smarta Business Builder, the complete online
tools package for growing your business. Website, Business
Planning, Accounts, Legal Docs and Email - all in one place - from
just £20 per month with no contract! Try it out today!