Business Loan Eligibility
There is no “one size fits all” when it comes to eligibility for business loans due to the differences in business types, funding needs and lender criteria.
Finding the right lender and the correct facility for your requirements can be time consuming and differences in eligibility between lenders can make the process even more difficult.
If you’re applying for business finance, it’s important to carry out research into different lenders and their eligibility criteria before applying.
Even with the variations in eligibility between lenders, all will look at the same key conditions.
- You’re 18 years of age or older
- You’re a current UK resident
- You have been trading for more than 12 months unless applying for a start up facility
- You are a UK registered business
- You pass credit checks
- You pass affordability checks
- Your business is financially stable
- What the funds will be used for
- How the funds will benefit your business
How much emphasis that is put on each of these factors will vary between lenders, which is why research can have a strong factor when applying to such facilities.
Where Can I Get A Business Loan?
There are wide range of lenders out there as alternatives to High Street Banks including challenger banks and alternative lenders.
The big 4 High Street Banks in the UK are Barclays, HSBC, Lloyds Banking Group and NatWest Group. The other Banks are known as challenger banks. There are also specialist finance houses, some of which will only take broker introduced business. The reason for this is because a decent finance broker will know the lenders criteria and be able to match a business’s requirements with a suitable lender.
High Street Banks have been the go-to for business loans and asset finance for a long time, however in recent years there has been a downturn in facility acceptances which has resulted in many businesses being unable to secure funding from the traditional source.
High Street Banks will generally be able to provide lower interest rates, however they tend to have stricter criteria for approval in comparison to specialist finance houses.
Alternative lenders have become increasingly popular in recent years by offering funding to businesses who have been unable to access traditional Bank funding.
Alternative lenders will tend to have more flexible lending criteria, which is one of the reasons why they have become so popular for UK businesses.
Why Do Lenders Run A Credit Check?
All lenders will look at your borrowing habits and repayment behaviour to determine credit worthiness. Your overall credit score can affect a loan application outcome in terms of approvals, interest rates, borrowing amounts and repayment terms.
Lenders will look at existing credit agreements, if you have any, to assess your debt management behaviour in terms of how much you owe and if you have made your repayments on time.
Having good debt management behaviour and there for credit score improves your chances of a getting a business loan and can help increase the amount you can borrow.
It is worth noting that having a good credit score does not automatically mean you will be approved for a loan, but it does help with approvals.
If your credit score isn’t as good as it could be, you can still access business funding because a credit score does not ultimately make an underwriter’s mind up and there are a wide range of lenders who will look at other factors in making a credit decision.
You will however have to expect higher interest rates and more stringent conditions due to the perceived risk of tier 2 or tier 3 credit covenants.
Applying with multiple lenders and being declined will be disheartening but can also have a negative effect on your credit score.
In addition, if you are applying for unsecured finance, there will be more emphasis on your credit score as you are not using assets as security.
How Can I improve My Credit Score?
This may sound strange, but one of the quickest ways to improve your credit score is by taking out more credit, then making your repayments on time.
Sticking to your credit agreement will over time improve your credit score making it easier to obtain more credit at better rate. Credit utilisation being less than 50% will also be help improve your credit score.
If you are unable to get more credit, stop applying, try to pay off any outstanding debts (on time) and start reapplying 6 months after your last business loan rejection.
There can also be a lot of emphasis put on the reason for the funds being required for your business and how that will benefit your business. If an underwriter can understand this clearly there is a better chance of approval.