Whether you’re just starting out or you have decided that now is the right time to invest in your business in order to take it to the next level, a business loan from a reputable lender can help you to achieve your goals. However, with numerous lenders out there offering an array of different business loan products, how do you know that you’re making the right choice?
There are lots of things to think about when applying for a business loan. In addition to properly considering your needs and circumstances, it is imperative to have all the relevant information to hand. This ensures that your application will be approved as swiftly as possible by your preferred lender. So, to help you on your business finance journey, here’s everything you need to know about how to get a business loan in the UK.
What is a business loan?
In addition to commitment, hard work and dedication, financial investment is also required to start and maintain a successful business. There are many ways to secure investment for your business and business loans are one of the most popular options. In fact, data illustrates that in 2021 more than 40%  of SMEs sought external finance to support their operations.
Business loans can provide much-needed injections of cash into a business in a variety of circumstances, including covering cash flow problems on a temporary basis and funding new equipment. Research shows that more than 40%  of all small businesses that secured finance in 2022 planned to use loans to manage cash flow, with a further 21% using funds to update equipment.
Are there different types of business loans?
Yes, there are a range of different types of business loans available which makes it possible to find a product that suits your business needs. Some of the most commonly used business loans include:
1. Unsecured business loans
Unsecured business loans do not require a business asset to be named as collateral, which may limit the maximum amount that a lender is willing to offer. Unsecured business loans are generally repaid in monthly instalments over an agreed time period.
2. Secured business loans
An asset is required to be named as collateral when taking out a secured business loan, which generally means that larger sums of money can be borrowed. There is a range of different assets that can be named as collateral, including computers and machinery, however, property is the most common.
Again, secured business loans are typically repaid in monthly instalments over an agreed time period. However, it is important to emphasise that the asset can be repossessed by your lender if you fail to make these repayments.
3. Working capital loans
Working capital loans are designed to cover the everyday running costs of a business over a short period of time.
4. Lines of credit
Most loans provide borrowers with a lump sum. Lines of credit, however, provide borrowers with a credit limit that they can use as much or as little of as required. Borrowers will only pay interest on the amount of money that is accessed.
Lenders will charge interest on the sum of money that is borrowed. The terms of repayment, including the length of time you have to repay your loan, will be clearly set out. Repayment terms will depend on a variety of different factors but typically range from a couple of months to several years.
As there are a range of business loans available, it is important to discuss your options with a qualified financial advisor who can help you to select the best product for your business needs. Unsecured and secured business loans are two of the most used financial products for businesses, with each having its own selection of advantages and disadvantages that are worth taking a closer look at.
What are the advantages of a secured business loan?
You are much more likely to be accepted for a secured loan, particularly if you are a new company owner looking to access a start up business loan. This is because lenders are less willing to lend money to new businesses with no history of loan repayment to look back on. To access this type of financing you will need to offer an asset as collateral, thus reducing the level of risk for the lender.
In addition to being easier to qualify for, secured business loans also typically come with lower interest rates because they are less risky for the lender.
There are also some secured business loan products out there that allow you to use money from the loan to purchase the asset you want to offer as collateral. This can be incredibly useful for very new businesses with no assets.
What are the disadvantages of a secured business loan?
For businesses with limited assets, a secured business loan may not be able to deliver the level of financing required. Plus, let’s not forget that any asset offered as collateral is at risk of repossession if regular repayments cannot be met.
The approval times for secured business loans are generally longer. This is because more time is needed for the underwriting process as lenders will need to accurately verify the value of the collateral you are offering.
What are the advantages of an unsecured business loan?
If a secured business loan is unsuitable for you and your circumstances, an unsecured loan could be a good alternative. As unsecured loans don’t require collateral, you won’t need to put any of your business assets at risk.
However, in order to access some personal loans, you may be required to sign a personal guarantee, which means your lender could repossess some of your personal assets if repayments aren’t made.
What are the disadvantages of an unsecured business loan?
It is much harder to qualify for an unsecured business loan, especially for new businesses with no track record of financial repayments to offer in support of an application. If you are eligible for this type of business loan, lenders may impose a more rigid selection of requirements. Alternatively, they may ask you to wait until you can demonstrate higher turnover or until you have been operating successfully for at least six months.
Unsecured loans also typically come with a lower upper borrowing limit because they are seen as a riskier option for lenders. Lenders may also compensate for this extra risk by charging higher interest rates and product fees.
How do I know if I’m eligible for a business loan?
Every lender will work with its own unique set of eligibility criteria. Generally, however, you will need to:
Be at least 18 years of age
Demonstrate that your business is located in the UK
Meet credit checks set out by the lender
Demonstrate a good business credit score
If your business is a startup with only a very limited history of trading, lenders may also perform a personal credit score check which will be visible on your credit report. We always recommend using online eligibility and credit score checking tools before submitting a formal loan application, as this will help you to understand how likely you are to be approved.
How to compare business loans
With so many lenders out there to choose from, deciding which products to apply for can be a confusing and overwhelming process. We always recommend using a business loan calculator which is an easy-to-use tool that will help you to identify the best loans for your circumstances.
A business loan calculator will also provide you with a general idea of how much you may be able to borrow. However, please note that accurate figures can only ever be obtained from lenders directly during the loan application process.
When comparing business loans, you should pay particular attention to:
Whether it’s a fixed or variable interest rate
The length of the loan term
Whether early repayment charges apply
It is also important to consider each lender’s reputation, paying particular attention to reviews from current and previous customers. It is vital that your chosen lender offers excellent customer service, allowing you to get any queries answered promptly and any issues solved efficiently.
How much could I borrow with a business loan?
There are a selection of factors that will impact the amount of money your lender will offer, including:
The type of loan you are applying for
The credit and financial history of your business
Your preferred repayment period
Generally speaking, the smallest amount of money a business can borrow is £1,000. The maximum amount available is much more variable, with lenders of unsecured loans placing caps at anywhere between £20,000 and £500,000. The upper borrowing limit for secured loans is generally much higher and can even stretch upwards into the millions of pounds.
How to apply for a business loan
Just as each lender works with its own set of eligibility criteria, every loan application process is slightly different. However, you will typically need to:
Determine the type of loan you want, how much money you want to borrow, and how long you want your repayment period to be.
Use Free Price Compare’s loan comparison tool to identify the best lenders for your needs.
Fill in a loan application form, which is a process that can generally be completed online or in person with a representative from your chosen lender. It is at this point that you will also be required to submit supporting documentation, including your financial history and your business plan.
Your lender will then evaluate your application, which may involve business and personal credit checks. Your lender will then tell you whether your application has been approved or denied.
If you have been approved, you will be provided with a decision regarding how much you can borrow and the rate of interest you will be charged. If you are comfortable with the terms set out in your loan agreement, you can go ahead and sign the relevant documentation to receive your funds.
How to get business loan approval from my preferred lender
Through the process of researching different business loans, you will naturally end up with a shortlist of preferred lenders that meet the needs of your company. There are several things you can do to improve your chances of being approved by one of your top choices, including:
Ensuring you understand the eligibility criteria used to approve business loans
Submitting all important documentation to support claims made in your application
Taking steps to boost your business and personal credit scores before applying
What documentation will I need to provide to be approved for a business loan?
Every lender is likely to request a different combination of documentation, so it is best to prepare for every eventuality in advance. You should have ready at hand:
Your business plan – which should detail precisely how you plan to repay the total value of the amount borrowed
Monthly bank statements – typically for at least six months
A forecast of your business cash flow – including both your incomings and outgoings
Detailed financial accounts – which detail profits and losses, cash flow statements, and balance sheets
Management accounts – which should offer a detailed overview of the general health of your business
General company documentation – including details of directors and shareholders, and registration information from Companies House
Do I need a broker?
It is possible to apply for a business loan directly or via a broker. Brokers are able to provide you with options from a range of lenders and may also be able to provide you with information relating to new financial products that will enter the marketplace in the near future. Additionally, the most experienced brokers are also generally well-placed to support you with the application process itself, including ensuring that you have all the required documentation easily to hand.
Brokers typically charge a commission or a standard fee, which you’ll need to consider when deciding whether to leverage their knowledge or simply apply directly with your preferred lender.