Business loans | A guide to getting business funding

How you qualify for a business loan varies between lenders, however there are common criteria that you must meet.

• Have a trading business for at least 1 year
• Provide company financials such as accounts and bank statements
• At least 1 director to be a UK homeowner if a relatively new start business (NOTE not required for long established entities)
• Have a rationale for the funds required

There are many things that are taken into consideration when applying for a loan.

• How long your business has been trading
• Number of company directors/owners/partners/shareholders
• Business financial status
  • Is it a profitable business?
  • Does it have current debts?
  • What is its credit score?
• Existing credit agreements (if any)
• Past debt management behaviour - have you made repayments on time and in full on previous credit agreements
• How will the loan benefit your business?

With this information a bank, a broker or lender can determine possible lending amounts, credit worthiness and loan affordability.

If your company is a partnership then all partners must agree to take out the loan if it is in the company's name.  If your company is a limited entity then providing personal guarantees may not be required but this is dependant upon the strength on the trading entity.

You do need to think about the difference between business loans from banks and those from alternative providers.  Business loans from banks are widely available but in more recent times have become harder to get.

Since 2017, business loans from banks have been declining [source: https://www.bankofengland.co.uk/statistics/visual-summaries/businesses-finance-raised]

Alternative finance provider approvals have been steadily increasing making sourcing finance easier for UK businesses. [source: https://www.p2pfa.org.uk/uk-peer-to-peer-lending-data-reflects-continued-maturity-of-the-sector-during-2018/].

You will need to provide several documents in order complete an application. The types of documents do vary depending on the type of finance facility you are applying for.

In general, the main types of documents are:

• Company Accountants
• Company bank statements in order to detail expenditure and current cash at hand

For asset finance or secured lending there are some additional documents that may be needed in order to process an application.

• Valuation reports
• Proof of ownership

• Acquisition and Deposit Funding -  Find out more
• Asset Finance - Find out more
• Bridging Finance - Find out more
• Case Acquisition Funding - Find out more
• Commercial Mortgages - Find out more
• Corporation Tax Loans - Find out more
• Debtors Funding Loans - Find out more
• Development Finance - Find out more
• Disbursement Funding  - Find out more
• Fee Block  Acquisition Funding - Find out more
• Income Tax Loans - Find out more
• Invoice Finance - Find out more
• Partner Buy In Buy Out Funding - Find out more
• Refurbishment Loans - Find out more
• Unsecured Business Loans - Find out more
• VAT Funding Loans - Find out more
• Working Capital and Cash Flow Finance - Find out more

Yes, it is possible to have more than one business loan at a time, but this is usually only on an unsecured basis.

When making new loan requests you will need to complete a new application and go through affordability and credit worthiness assessments.  Each individual loan will generally have its own separate agreement and be treated as separate lines of credit.  

With secured business loans, if a facility has already been secured on a property, then usually no other loans can be secured on that property as there can only be one second charge on each property.

In some cases, if there is enough equity still available in the property there can be more than one business loan secured on it by way of second and third charges.  In these instances the initial charge holders will need to agree for the subsequent charges to be added.

Having a good credit score improves your chances of a business loan application being approved and can help increase the amount you can borrow as well as the terms that could be available to your business.

Good credits scores can also help you achieve lower interest rates in comparison to those with poor credit. However, this is dependent on a variety of factors.

Good credit doesn't automatically mean you will be approved if the business is not showing the required level of profit, trading time (12 months plus is a requirement for a lot of lenders) or the desired loan amount is over affordability thresholds.

Good personal credit with personal guarantees can increase amounts at times.

Yes, there are lenders who specialise in high risk loans for businesses where the company directors/shareholders have lower credit scores.

Bad credit business loans can have higher interest rates and more stringent conditions due to the perceived risk of poor credit applicants.

This will vary between lenders based upon the applicant's credit status, current financial commitments, existing business loan agreements and credit history as well as the rationale behind the funds required.

In fact, there are several lenders who favour loan applications from clients and businesses with bad credit, this is their niche market.

How can I improve my credit status?

One of the quickest ways to improve your credit status is by getting more credit but only if pay your repayments on time to keep to your credit agreement, but you must be careful not to cause cash flow problems with more debt obligations.

Lenders look at your past credit usage behaviour when deciding if you are a suitable applicant.  Paying your loan repayments on time and in full gives you a lot of brownie points by showing you honour your financial agreements.

If you are unable to access credit or have been rejected by multiple lenders you need to stop applying, try to pay off any outstanding debts (on time) and start reapplying 6 months after your last business loan rejection.  You may wish to speak to the money advice service if you are having problems paying off your debts.

Getting a small business loan has become increasingly easier due to the number of lenders, the emergence of alternative finance providers and the development of fintech companies.

Accessing small business funding, sometimes referred to as SME finance, is generally quicker with the development of online application services and lenders who specialise in small business loans.

Traditional bank loans have been increasingly difficult to get for many businesses within the UK but with alternative finance providers entering the market there are now more options for small businesses who are looking for external finance.

Small businesses can find it harder to gain funding in comparison to large corporations.  Many small businesses may not have long trading histories or detailed financial accounts, with many filing micro accounts.  This makes it difficult for banks to assess affordability.

However, there is a wide range of lenders that specialise in small business loans and SME finance with more and more businesses taking advantage of the increased options.

Online business loan providers can speed up the application process as all documents and accounts can be uploaded online.  Although this does not mean that they are instant business loans it does mean that you can get application decisions online in 24 hours.

This depends on several factors.

Applications for business loans for start ups, small businesses, SMEs or businesses without existing finance facilities, personal credit scores can be evaluated by a lender to assess business loan affordability.

For businesses without existing loans or facilities, lenders may use the company owner(s) personal credit score to assess credit worthiness.  Without payment histories from other facilities lenders find it hard to assess how you manage your repayments and whether you are likely to stick to your loan repayment plans.  If an SME has an owner or owners with poor personal credit this can be detrimental when applying for business credit.

Lenders do place high importance on company revenues, profit and loss and existing financial commitments, which allow them to evaluate your businesses strength and profitability.

If a company is deemed as “risky” then more focus will be placed on the owner(s) personal status.

For larger companies with high level trading and extensive trading times less focus is placed on the owner(s) personal credit scores when applying for business funding.  The reason for this is that lenders can assess creditworthiness more easily due to more detailed trading histories and accounts.

Business loans that do not use collateral are known as unsecured business loans.  These types of loans do not use property or assets as security.  But in some cases the lender can request personal guarantees and indemnities from the business owners or directors.

Unsecured Loans

Unsecured loans are generally quicker to process and receive funds from as there is less paperwork and other assessments to carry out when applying for a loan.

Without collateral, the loan application is assessed based on the business credit worthiness and in most cases the business owner(s) personal credit score [find out more].  Another important factor to consider is how will the loan be of benefit to the business.  For example a loan to a business may help the business performance improve.

Unsecured Business Finance Affordability

Affordability assessments are carried out and lenders with look to assess your ability to manage debt based on previous credit agreements and repayment profiles, the financial status of the business in terms of profitability and how long the company has been trading.

Credit Status

Depending on your credit status assessments can be more stringent and the amount you can borrow may be smaller in comparison to secured loans as there is no collateral being offered as security. However, this is not always the case.  Your credit status and business financial status may allow you to borrow significantly higher amounts than if you secured a loan on a low equity property or low value assets.

It is worth speaking to a professional, such as a finance broker, to determine which is the best route to take based on your loan requirements.

There's no limit on how much you can borrow with an unsecured loan, but the amount a lender is willing to agree to is credit dependant.

For new businesses or those that have been trading for less than 12 months the amount you're able to borrow can be significantly lower than for well-established and profitable companies.

You do need to think realistically about how you can repay, making sure you are able to afford repayments in full without negatively impacting on your company's cash flow.

Unsecured Loans

Unsecured loan amounts are limited by

• Credit Score (in some cases)
• Existing finance agreements
• Company profits
• Company financial health
• Trading time

The above is just an example and is not definitive.  There are several other variables and reasons that could determine a decision by an underwriter.

Secured Business Finance

When applying for secured loans, you are limited to the amount of equity available in the property or asset being used as security.

The amount you can borrow depends on LTV (loan to value).  LTV can range from 50-80% and takes into consideration any money currently owed such as mortgages or other charges (loans secured on the property). 

If you are using assets such as plant equipment or vehicles, this is known asset finance [find out more] and the amount you can borrow is based upon the current value on the asset being used as security.

A valuation will take place by a lender before any loan amounts are agreed but this is usually only where funds are being secured against a property.

It is worth keeping in mind that the valuation will be based on the current value of the property and not the original purchase price.

Most assets will naturally depreciate in value due to age, usage, wear and tear.  Properties on the other hand are more likely to increase in value but this isn't always the case due to fluctuations in the property market.

How fast secured business loans are approved and paid out depends on how quick all the documentation is completed.  If your company is looking for quick secured business loans then it is a good idea to have the documents such as proof of ownership, purchase receipts and sales invoices ready to help speed up the loan application process.  It is also beneficial to have a reputable solicitor or law firm that can act quickly on your behalf.