Business owners can quickly find themselves overwhelmed by information as they begin their borrowing journey, making it hard to know what’s really important or how to make the best decision for their business. So we at Swiftfund have put together the ultimate guide to British business loans, to help you get started on the right foot:
The Purpose of Business Loans
The fundamental purpose of a business loan is to help a business afford something it would not otherwise be able to. This could be any business-related expense, including:
- Working capital
- Inventory costs
- Equipment purchase, repair or upgrade
- Property-related costs
- Debt consolidation
- Marketing and advertising costs
- Business start-up or business purchase costs
- Employee-related costs (e.g. wages, training, etc.)
- Business expansion
The Structure of a Business Loan
All forms of business borrowing have the same basic structure:
- A business applies for financing from a lender
- The lender either approves or rejects the application
- If the application is approved, funds are released
- The borrower then repays the borrowed funds, plus any interest and/or fees, according to a pre-agreed repayment contract
As there can be enormous variations in borrowing amounts, costs, repayment methods and conditions, it’s important that the business doing the borrowing fully understands the terms of any specific loan before agreeing to it.
Types of Business Loan
Most people use the phrase ‘business loan’ to refer to any type of business financing, but that can be a little misleading. Technically, ‘business loan’ actually refers to one specific type of borrowing: a term loan. This is the most common form of business borrowing in the UK, and it involves fixed repayments over a set period of time. But, despite their popularity, term loans are not necessarily the best solution for every business. And luckily, there’s a lot of other types of business financing to choose from, including:
- Business lines of credit
- Merchant cash advances
- Invoice factoring loans
- Equipment loans
- Business credit cards
- Government loans
Each type of business financing has its own pros and cons, so in order to choose the right one for your business, you need to understand: 1) your business’s financial needs and situation, and 2) your business’s priorities.
Lenders of Business Loans
You don’t have to go to a high street bank if you need cash for your business; the market is buzzing with business lenders, including:
- Online lenders
- Traditional banks
- Challenger banks
- Community development financial institutions
- Local or national government
- Private lenders
As you might expect, each lender has their own terms and costs, and not every lender offers every type of business loan. Start by understanding what type of financing your business needs, and then you can search for the most competitive lender in that field.
Qualifying for a Business Loan
A common misconception is that UK business loans are hard to get, but this just isn’t the case. While some types of financing, and some lenders, can have strict eligibility criteria, there are also many that are flexible. As a business owner, you need to understand your business’s financial profile, so you can determine where and for what your business will qualify.
Crucially, this means you need to know your business’s:
- Credit score
- Trading history
- Assets
- Existing debts
- Size and turnover
These characteristics will determine which lenders are most likely to approve you, what types of business financing you qualify for, and the terms of your financing. And while not every lender looks at all of these characteristics, all will consider at least some of them.
Applying for a Business Loan
You can apply for a business loan in-person, if the lender you choose has physical branches, or online. Many opt for online applications as they are convenient and secure, and provide step-by-step instructions on how to complete the application. But, before you can start your application, you need to gather together some paperwork. Different lenders require different items, but in general you can expect to need:
- Recent business financial statements (e.g. balance sheet, cash flow statement, etc.)
- Business bank statements
- Business legal documents (e.g. articles of incorporation, business license, etc.)
You may also need to provide:
- Business plan
- Personal and/or business tax records
- Statements regarding assets/debts
Choosing a Business Loan
The variety in types of business financing means that almost anything is possible. Borrowing amounts can be as low as a few hundreds pounds, to over £1 million; repayment terms can be a few months to eight years; and interest rates can be just a couple of percent, to over 50%. Selecting a lender and financing type that align with your business needs is therefore critical. To do this, consider:
- The money’s intended purpose
- Your business’s current financial situation (credit score, income level, length of time in business, and debt levels)
- Whether your business has any assets that can be used as collateral (as secured loans often have better terms than unsecured loans)
- Your business’s repayment ability; fixed repayments and flexible repayments are both possible, so understanding your cash flow and budget is essential
- Loan costs, including interest and fees, and other loan terms
If you need more help understanding your business’s borrowing options, contact us. And read our blog to gain more insights into running a successful business in the UK.