Things to Remember When Taking Out a Business Loan

May 12, 2022
Photo by Cytonn Photography on Unsplash

Business loans can prove especially useful in helping to fund goals or push ahead on a prolonged project. There are a number of loan options available, offered from start-ups and SMEs through to well established large businesses.

It is important to remember that before you take out a loan, you should make sure to have a detailed plan on how you are going to use it, as well as a repayment plan to avoid falling into arrears and incurring late fees.

The Types of Financing Available

Before applying for a loan, you need to work out actually where the money will be spent. This is because there is a large variety of loans available for different needs such as lines of credit through to traditional term loans. Each type of loan comes with differing terms, rates and repayment options.

You have a number of options including unsecured, credit card, secured, guarantor or invoice factoring – you might need to consider how long you need the loan for, how much you wish to borrow and whether you will need finance on a revolving basis.

Unsecured: This is where a loan is not secured against any assets, so your eligibility is based on factors such as your income and credit score. This is typically for a maximum of £50,000 and ideal for people with good credit.

Credit card: With a set credit limit each month, you have the opportunity to borrow money for business purposes such as subscriptions, travel, inventory and more. The rates can be 0% assuming you repay in full at the end of each month and you can also receive rewards, air miles and other perks too.

Secured: This is where you are borrowing against security or a valuable asset such as a vehicle, machinery, residential or commercial property. With secured business loans, this allows you to leverage the value of your valuable property and possibly borrow larger amounts, even in the millions. But it is essential to stay on top of your repayments or your property could be at risk of repossession.

Guarantor: This is a type of personal loan where you can borrow money with the help of a guarantor or someone you know to co-sign the loan agreement. This is often for people with bad credit or no credit history, with maximum borrowing amounts at around £10,000 or £15,000.

Invoice factoring: If you have any big orders from a client, you can show this invoice to a business lender who can lend you up to 80% or 90% of its value upfront for working capital. This is common for retail and fast moving consumer products.

Grants and government funding: Depending on certain income brackets or working in sustainability or R&D, there are some government grants and schemes available – and this can certainly help get your business off to a fine start.

Check the Eligibility Criteria

Many lenders require the business to have been servicing for a minimum amount of time before they are deemed eligible to apply for a business loan. This typically ranges from six months up to five years.

As such, it can be more difficult for newer businesses or start-ups to receive a loan.

It is important to thus always check with the lender on their loan eligibility guidelines.

Understanding the Lender’s Approval Process

Businesses may actually have a better chance of business loan approval if they have previously worked together with the lender.

Otherwise, lenders typically work against three key factors when working out whether to fund a loan. These include the business’ ability to repay the loan, the need for the money requested, and the business’ credit score and history.

The gross revenue or number of employees in this instance matters far less. Credit scores are instead critically important when applying for a business loan. A track record of debt and poor repayment will worsen a business’ chances of successfully gaining a business loan.

Documents Will be Required

Some of the following may be required in the instance of applying for a business loan:

  • Forms of ID
  • Financial statements, including bank statements
  • Proof of tax returns
  • Legal documents including business licenses

What Requirements Are There For People Looking for Self-Employed Loans?

If applying for a loan when you are self-employed, you typically need to show the lender a minimum of 2 years’ accounts and demonstrate a regular income and revenue stream. If you are in profit, even better, this will only help your chances of approval.

Preparation is key

Depending on the type of business loan product, the approval process can take a day or two, to even a few weeks, especially if you are using an asset or borrowing against security. So the more information you can have ready for the lender and be available to respond by email or phone, will certainly help you push through your application and get it funded as quickly as possible.

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