Author: Smarter Loans

A good credit score is essential if you want to secure the most competitive business loan interest rate. But it’s not something that happens overnight; solid credit takes time to build and it’s never too early to start, even if you’re not yet in the market for business financing! Here’s how you can nurture your business’s financial profile for now and the future:

1. Pay Your Bills On Time

It may sound simple but one of the fundamental metrics used to calculate credit score is payment history. Bills that are paid promptly and in full help establish positive credit, while late and missed payments will lower your credit score. Using direct debits to keep on top of your regular expenses can help minimise the workload associated with this, but if you choose this option, you need to ensure there is always enough cash in your account to cover scheduled debits. A bounced payment will negatively affect credit score.

2. Minimise Debt Levels

The amount of debt your business holds will also affect its credit score. The technical term for this is credit utilisation ratio – the amount of debt compared to your business’s credit limit. High debt levels means your business already has plenty of debt obligations, and lenders are less likely to think it can handle more. Therefore paying off existing debts, before pursuing a new business loan, will improve your score. Similarly, closing inactive accounts can help with financing eligibility. 

3. Let Your Credit History Grow

One of the unavoidable facts about credit is that it takes time to establish. A new business is considered inherently riskier than a long-standing one; lenders like to see a pattern of good financial behaviour over an extended period of time. So one small way to improve your business’s credit score is to simply give it time. From start-up, create good financial habits (such as paying all bills on time). If there have been credit issues in the past, prioritise steps that will improve it as quickly as possible.

4. Limit New Credit Applications

When you apply for a new credit product, such as a business loan, the lender you apply to will perform a credit check in order to assess your application. This credit check acts as an indicator you’re thinking of increasing your debt levels, and so has a (small) negative impact on your business’s credit score. This is why it’s important to limit the number of new credit applications you make at any one time. Do your research before applying for a business loan, so that you’re only making one application.

5. Mix Up Your Types of Credit

Another factor in credit score is whether a business is able to successfully manage multiple different types of credit. A business that shows a positive history in managing traditional loans, credit cards, asset-based loans, and other types of loan, is considered a safer bet than a business that has a history of only managing one type of loan. So to improve your business’s credit score, try to have a mixture of different credit types – while still keeping your overall debt levels as low as possible.

6. Keep Your Accounts in Good Order

Well-kept accounts that are filed correctly and on time is a sign of financial prudence, and can help a business appear more favourable to lenders. This is not just about what’s in the accounts, it’s about how you as a business owner are taking responsibility for following proper financial administrative steps, boosting transparency and credibility. So don’t let paperwork take a back seat to other operational matters. And make sure that any business changes (such as registered office address, directors details, and so on) are promptly updated with HMRC and Companies House. 

7. Check Your Credit Report for Errors

Your business’s credit score is kept track of by several major independent organisations – but they’re not infallible. Mistakes can and do occur, and these can negatively impact your business. So it’s worthwhile scheduling a regular check of your business credit report, so you can identify any errors and rectify them as quickly as possible. 

8. Check Who You Work With

Not all risks to your business’s credit score come from within; sometimes you can be let down by suppliers or customers, impacting your cash flow and potentially harming your credit. So consider performing credit checks on those you regularly do business with and who have the potential to impact your bottom line; just because you’re being financially responsible, doesn’t mean they are.

9. Maintain a Healthy Cash Flow

The ability of a borrower to repay their loan is the fundamental concern for a lender, and one way to alleviate this concern is to maintain a healthy cash flow. Plenty of cash coming in, regularly, shows your business is likely to continue to have the funds to make its loan repayments in the future.

10. Don’t Ignore Your Personal Credit Profile

Lastly, don’t overlook the personal credit histories of all business owners. This is especially true for newer businesses, small businesses and sole traders, but any business may have its owners’ credit histories checked when they apply for a business loan. Bad credit or a significant credit event in a business owner’s past can impact their business’s ability to secure financing.

Not all types of business financing rely on credit score; if your business needs funding that’s based on cash flow rather than credit, talk to Swiftfund to find out how a merchant cash advance could work for you.

Businesses need to understand all of their different expenses, and the costs associated with loans are no different. It’s vital you fully understand all of them, especially interest, before making a financial commitment to a business loan. Here’s what you need to know:

Different Types of Business Loan Costs

The majority of the cost of any business loan comes in the form of interest. Interest is how lenders make a profit; for every pound they lend out, they receive an extra percentage back. This extra percentage is known as the interest rate, and depends on a number of factors.

Interest costs are not the only ones you need to know about though; business loans can also charge a variety of loan fees. These fees can sometimes add up to thousands of pounds, and differ a lot between lenders and types of business financing.

Understanding Interest Rates

The amount of money a business borrows from a lender is known as the principal. Interest is charged on the principal; for example, if you borrow £1,000 and are charged 6% interest per year, then after one year, you would need to have repaid the original £1,000 plus 6% of £1,000, which is £60. So the total repayment amount totals £1,060.

This is how interest works in a very basic way, but the majority of loans require a bit more thought, because interest accrues. Think of it this way: if we take the above example, but instead of repaying the £1,000 loan over one year, you repay it over ten years. You are charged 6% interest per year that you have the loan, but the interest charge itself gathers interest. So in year two, you’re paying interest on £1,060 – which is £63.60. So the total repayment amount becomes £1,060 + £63.60 = £1,123.60. In year three, you’re paying interest on £1,123.60, which is £67.42. And so on. This is why longer term loans cost more in interest than shorter term loans with the same interest rate.

The variables that affect the overall cost of a business loan are therefore: the principal, the interest rate, and the loan term. With these three numbers, you can calculate the overall cost of a loan. If you know your repayment frequency, you can also calculate your individual loan repayment costs. There are dozens of free loan calculators available online to help you do just this. 

Factors That Affect Business Loan Interest Rates

The next big question is: what interest rate will you be charged for a business loan? There are a number of factors that affect this:

1. The Bank of England base rate (which is reviewed eight times per year and can go up or down depending on a range of national and international economic factors)
2. The state of the loans market and competition/risk appetite among lenders
3. Each individual lender’s profit margin (which is why different lenders often charge the same borrower different rates)
4. The type of business loan (for example, secured loans are considered less risky by lenders, and so usually have lower interest rates than unsecured loans)
5. The length of the loan term (generally, longer term loans have lower interest rates than shorter term loans, but because of cumulative interest, this does not necessarily mean they are cheaper overall)
6. Borrower-specific characteristics, including:
   • Business credit score
   • Business age
   • Business income
   • Business assets
   • Industry the business operates in

As you can see, some of the factors that affect interest rates are very general, while others are specific to each individual business. Businesses with preferable characteristics (e.g. good credit, high income, etc.) are considered safer to lend to, and so are able to access lower interest rates than businesses that are considered riskier. This is another reason why shopping around for the best deal on a business loan can make such a difference to your overall cost – different lenders use different metrics to assess potential borrowers’ riskiness.

Fixed Rates vs. Variable Rates

Lastly, we need to mention that not all rates work in the same way. There are two major categories of rates: fixed rates, and variable rates. Fixed rates stay the same over the term of the loan (or, sometimes, for very long-term loans, they are fixed for a set number of years before changing). Variable rates do not; they can fluctuate depending on the market. This makes variable rates less predictable and less stable, but potentially lower than fixed rates (depending on economic conditions). 

All rates, whether fixed or variable, should be considered and compared using the same metric: annual percentage rate, or APR. The APR is the average rate over a year. Because some loan products advertise low introductory rates, changing rates, or have hidden fees and extra costs, it’s not always possible to compare them without a standardised metric. The APR is this metric; it includes all interest and standard fees and makes it into an annual figure, allowing you to appreciate a loan’s true cost and how different loans stack up against each other.

Understanding Loan Fees

The APR of a loan will include some loan fees, but not all. And because some loans charge fees and others do not, it’s worth understanding how this aspect of loan costs works. Any business loan can in theory charge a number of different fees, including:

• Application fees
• Loan origination fees
• Processing fees
• Annual fees
• Administration fees
• Early repayment fees
• Late payment fees
• Closing fees

As fees are so variable between lenders and loan types, it’s very important you understand which (if any) you will be charged when applying for, accepting, managing and closing your business loan. The APR of a loan will include some of the fees named above (the standard fees applicable to everyone), but not all, as repayment fees and penalties can vary from borrower to borrower. This is why you will sometimes see a business loan’s rate stated as an AER (annual equivalent rate). This is the annual compounded rate of interest of a loan, without any fees included at all. Be extra sure when comparing loan costs whether you’re looking at AERs or APRs, and what extra costs you might be liable for.

If you’re considering business financing but want to avoid all of the worries around interest and fees, we can help. Talk to Swiftfund today to understand how a merchant cash advance simplifies the borrowing process.

You don’t need to be a paperwork whiz to get a business loan in the UK; all you need is to comprehend the process and follow a few simple steps:

In order for a loan to actually help your business with what it needs, you have to know what those needs are. You can do this by answering the following questions:

1. How much money does your business need to borrow?
2. What is the money for?
3. How quickly is the money needed?

With this information, you can determine the size and type of business financing that might work for your business, as well as narrow down the field of possible lenders.

Step 2: Understand Your Financial Position

Hand-in-hand with understanding your business’s needs is understanding your business’s financing eligibility. It’s all very well asking a lender for a million pounds, but if you can’t afford repayments, the lender won’t approve the loan. And even trying to make those repayments could bankrupt you. So it’s vital you acknowledge what’s possible given your circumstances. You need to know:

• Your business’s credit score
• The length of its operating history
• Its cash flow
• The details of any business assets that could be used as collateral
• Existing business debts

This information will allow you – and any lender – to assess how much your business can realistically afford to repay, and the potential risk (from a lender’s perspective) of giving your business a loan. Generally speaking, more established businesses, businesses with strong cash flow, few existing debts, assets that can be used as collateral, and businesses with good credit scores will find that they can borrow more, from more lenders, and at a lower cost than those without these characteristics.

Step 3: Consider Your Borrowing Options

Now comes the hard part: given what you know about your business’s needs and financial situation from steps one and two, you must narrow down all of the possible business financing options that exist in the UK to just those that make sense for you. That means finding financing that:

• Provides the amount of money your business needs to borrow
• In the timeframe your business needs it in
• To businesses with your financial profile
• With affordable repayments that work for your business

Many businesses find that searching by eligibility criteria (i.e. what credit score, income etc. a business needs to get a loan) is one of the quickest ways to determine lenders and loan products that might work for them. For example, if your business has bad credit, there is very little point in considering term loans from high street banks, as these almost always have a minimum credit score requirement. 

But eligibility should not be your only concern. A loan that you can get approval for, but that doesn’t help your business with what it needs, is useless to you. That’s why considering loan amount, repayment type, repayment schedule, application processing times, and loan costs all matter too. And remember that every lender has different terms, so shopping around to find the best option given your constraints is essential.

Step 4: Gather Your Paperwork

Once you have a clear idea of which lender you want to apply to, you need to get your paperwork ready. Not all lenders ask for the same set of documents, but many have similarities, so it’s worth digging out:

• Business legal documents, such as articles of incorporation
• Latest business financial statements, including cash flow statement, balance sheet and income statement (if you don’t have up-to-date versions of these, you will likely need to get them)
• Business bank statements for at least three months
• Business tax returns for the past two years
• Proof of ownership of assets (if pursuing a secured loan)
• Proof of address and ID for the business owner(s)
• Personal tax returns for the business owner(s)
• Your business plan

Step 5: Complete an Application

Now you’re ready to actually apply for a business loan. Most lenders have simple, secure online application systems that allow you to upload your documents and submit an application entirely at your own convenience. However, in-person applications are possible too, if the lender you choose has physical locations nearby. 

In either case, you need to make sure you have all of the documentation requested by your chosen lender, and you need to carefully complete the application form, truthfully and in full. Once you have done this, check it thoroughly, and submit it for consideration. Avoiding any mistakes or missing information in your application will prevent unnecessary processing delays.

Once received, most lenders will send an acknowledgement of receipt; it can then take anything from a day to several weeks to receive a reply (depending on the lender and their processes). And if your loan application is denied, don’t despair. Your business may well still be able to get a loan from another lender; it’s worth asking why your application was rejected, so you can better choose where to apply next time, thus increasing your chances of approval.
If you need more help understanding your business’s borrowing options, contact us. And read our blog for a range of useful information for UK businesses.