Whether your business is just kicking off or you’re a medium-sized company looking to invest in a new venture, a business loan could be just what you need to help finance new capital. Business loans come in a range of shapes and sizes, starting from a small boost of a few thousand pounds – up to a million pounds and more. The size of the loan and underlying terms that come with the loan will typically be based on the health of your company. In other words, the stronger your balance sheet looks in the eyes of lenders, the more favourable the terms will be.
With that being said, business loans are slightly more complex in comparison to personal loans. As such, we have created the ultimate guide to Business Loans. Within it, we’ll tell you everything that we think you should know – such as how business loans work, who they are suitable for, how much you can borrow, what interest you’ll typically pay, and more.
- 1 What are the Pros and Cons of Business Loans?
- 2 How to Apply for a Business Loan? Read our Step-by-step Guide:
- 3 Best 3 business loan providers
- 4 What is a Business Loan?
- 5 FAQ
- 6 How much can I borrow via a business loan?
- 7 What is invoice factoring?
- 8 Can I get a business loan if I am a sole trader?
How to Apply for a Business Loan? Read our Step-by-step Guide:
If you’ve never applied for a business loan before, then you should know that the process could differ from that of a more conventional personal loan. For example, if your business is trading as a limited company, then it’s likely that the lender will be more focused on your balance sheet, as opposed to your personal assets. On the contrary, if you are self-employed, or your business has just launched as a start-up, then the lender might need to unravel your personal creditworthiness.
Nevertheless, to give you an idea as to how the business loan process typically works, we have outlined the fundamentals below.
Step 1: Find a suitable lender
First and foremost, you will need to find a business loan provider that is suitable for your individual circumstances. You will need to look at key metrics such as how much the provider is able to lend your business, as well as the rate of interest they typically charge. In some cases, you might be best off sticking with a traditional high street bank or building society for your business loan needs, as the APR rates on offer will likely be very competitive. However, if your business is yet to take off, you might need to consider a specialist lender.
Step 2: Start the application process
Once you have found a suitable business loan provider, you will then need to get the application started. Initially, you will need to let the lender know how much you wish to borrow, and for how long. Make sure that your repayment terms are sufficient to meet your business’s cash flow forecast.
Step 3: Provide details about your business
You will now need to provide some information about you and your business. Firstly, you’ll need to enter details about your personal identity, such as your full name, home address, date of birth, and contact details. Next, you’ll then need to enter information about your company. This will include the trading name of your company, the status of the company (sold trader, limited liability, etc), the registered address of your company, and your company’s contact details.
You will also need to provide some detailed information about your company’s current financial standing. The good news for you is that some lenders are able to extract the required information from third-party sources, such as your previously filled accounts at Company House, as well as specialist credit bureaus.
Step 4: Provide documentation
Although business loan providers have a range of external third-party sources that they can use to verify your information electronically, it is likely that you will still need to upload some supporting documentation. The specific documents will vary depending on the type of business loan, the size of the loan, and the type of company set-up you have. If you are a sole trader or your company was only launched recently, you might need to provide documentation regarding your personal financial standing, such as bank account statements or homeowner ownership deeds.
Step 5: View your terms and sign the business loan agreement
Once you have provided the required information and supporting documentation, the lender should be able to give you a decision on your business loan application within 1 working day. If your application was successful, then you will be presented with your loan terms.
This will include the amount that the loan provider is able to lend you, the underlying APR rate, when you need to make your repayments, and whether or not the loan is secured or unsecured. If you’re happy with the terms outlined, then you’ll need to sign a digital loan agreement. Finally, the lender will then transfer the funds into your business bank account – which typically happens within 1-2 working days.
Best 3 business loan providers
There are now heaps of options available to you when it comes to choosing a business loan provider. However, the specific lender that you go with will depend on a range of factors, such as the size of your business, the type of business loan you require, how much you need to borrow, and the current financial standing of your company. Nevertheless, we have listed the best 3 providers that we think should suit most small-to-medium businesses in the UK.
Before you peruse through our recommended providers, be sure to read the criteria below that we typically look for in a lender.
Criteria used to rank the best business loan providers
❓Lenders with the most competitive interest rates
❓How much the lender is able to offer
❓The type of business loans available
❓What financial standing your company needs to have to be eligible
❓Whether you need to put up assets as security
What is a Business Loan?
In its most basic form, a business loan is a type of financing that is tailored towards businesses. In some cases, this could be a few thousand pounds for a new business start-up, right up to a couple of million of pounds for an established company of significant size. However, it is important to note that business loans come with a range of shapes and sizes. While the most common business loan type is that of a conventional bank or building society loan, other options exist, too. For example, you also have the option of invoice factoring, a business overdraft, rolling credit facilities, and even asset backed loans.
As such, we have listed the main business loan types below for you to consider.
✔️ Bank Loans
As noted above, the most common type of business financing is that of a conventional loan. This will usually come from a traditional bank or building society, although in some cases, it could be from a specialist lender. This is likely to be the case if your business was recently launched, or if your business is currently in an adverse financial position.
The fundamentals of a business loan from a high street lender will work much in the same way as any other loan type. In other words, you will borrow a fixed amount of money at a fixed rate of interest. You will then make your repayments each and every month until the loan is repaid in full.
✔️ Invoice Factoring
The second option that your business has at its disposal is that of invoice factoring. This is highly useful if your business is getting a lot of orders, but you don’t quite have the cash flow levels to facilitate the order. For example, this could include the costs of manufacturing the goods, or the costs of ordering them in from a supplier.
Either way, invoice factoring will see the lender give you an amount of cash that is proportionate to the size of your purchase order. This can be as high as 95% of the order amount, which should be sufficient for you to meet the costs of facilitating the order.
Here’s a quick example of how invoice factoring works in the context of a business loan.
- Your paper merchant business receives an order from a customer to the value of £50,000
- You need to order the stock in from a supplier, which will cost you £30,000. However, your business doesn’t have enough cash to do this
- As such, you present the purchase order that your customer sent you for £50,000 to your invoice factoring provider
- Your invoice factoring agreement allows you to receive 80% of the purchase order value upfront
- This means that the lender can transfer up to £40,000 (80% of £50,000) into your account, although you only request £30,000 to cover the cost of the order
- Once you receive the cash, you then pay your supplier and deliver the goods to your customer
- As soon as your customer pays you, you can then forward of the £30,000 that you borrowed from the invoice factoring company, plus the interest that came with the loan
✔️ Revolving Credit Facilities
If your business is unable to predict the future with sales and operations, then it might be worth considering a business loan in the form of revolving credit facilities. In a nutshell, this operates in a similar nature to a conventional overdraft, insofar that the lender will give you a draw-down limit.
For example, you might receive a credit facility for £25,000, which is the most that you will be able to utilize. The great thing about revolving credit facilities is that you only pay interest when you actually draw down the money. As such, it acts as a safety net in times that you need to meet financial obligations when cash flow levels are unable to do this.
How much can I borrow via a business loan?
The specific amount that you are able to borrow will depend on a full range of factors. This will include the type of company set-up you have (limited company, sole trader, etc), the creditworthiness of your business, and the type of business loan you are looking to obtain. With that being said, business loans usually start from just £1,000, all the way up to a million pounds-plus..
What is invoice factoring?
In its most basic form, invoice factoring is where the loan provider lends you funds against a purchase order. For example, if you receive a new order from a customer and you need financial assistance to meet the order in full, the lender will give you a percentage of the total order amount upfront as cash. Invoice factoring is perfect for companies that struggle with cash flow - especially startups.
Can I get a business loan if I am a sole trader?
There are plenty of lenders out there that are willing to lend to sole traders. However, the process is going to be somewhat different to that of a business that is registered as a limited liability company. Most crucially, as a sole trader you will likely need to put your personal assets up as security in order to get the loan, and the amount that you will be able to get is likely to be much lower than an established limited company.