Whether you’re looking to grow your business, invest in equipment, or simply get through a difficult patch, a business loan can help turn your plans into reality. From invoice finance, to working capital loans, there are a lot of different options. It can be confusing to know what will most benefit your business. In this short guide, we’ll give you a comprehensive overview of business loans, from what they are, to how to get one to help you get started.
What is a business loan?
A business loan is an amount of money, lent to a business, strictly for the business itself to use. The lender will be repaid over a pre-agreed length of time, typically between 6 months to 5 years, plus interest.
There are several types of business loans, differentiated by what the funds will be used for. You could look for a business loan simply for working capital, to purchase new stock, or to purchase a specific asset. Its purpose will often affect which lender will be most suitable for you.
Understanding how a business loan works and what options are available to you, will help you to make sure you are finding the best option for your business.
How can I get a business loan
To apply for a business loan, most lenders will need companies to be VAT registered and trading for at least 3 months. There are some lenders that will offer loans for new, startup businesses, but these are limited. A longer trading history typically means there are more options.
To apply for a business loan, lenders will need some documentation to come to a decision. A general rule of thumb is that the more funds you’re looking to borrow, the more lenders will need to know. To save you some time when you apply, have these documents ready:
- 6 months bank statements
- Last set of company filed accounts or last self assessment
- Details of what the funds will be used for
- Banks and lenders are also likely to check your business credit score to see your ability to make repayments.
Top tip: when applying for a loan, tick these 3 things off your checklist: check your credit profile, get your finances in order, make a plan (make sure there is a clear purpose for what you’ll use the funding for).
How much can I borrow?
How much you can borrow will depend on a few key factors. Things that will impact how much a lender will loan you include:
- How old your business is
- Your annual turnover
- The strength of your business credit score
You can get an estimate of how much you can borrow, using the business loan calculator. With a couple of quick steps, you can find out how much you can borrow, what the business loan repayments will be, and which lending products will suit you best.
Top tip: a good business credit score will maximise your chances of being offered a loan with lower interest rates. Check your business credit score.
What other types of business finance can I apply for?
The type of business finance you apply for, will partly come down to why you actually need the funds. Lenders will want to see that you plan to use the funds for a specific purpose.
The nature of the business will also have an impact. How your customers pay you, can help determine which type of business loan will work best for you.
Invoice Finance
If you invoice your customers, your cashflow may suffer from late payments or drag from longer payment terms. If that sounds familiar, invoice finance could be a helpful option for your business. Invoice finance is a way for your business to generate cash from your unpaid invoices by using them as a security for funding. Funds are secured against your debtor book, so it comes with no risk to your assets and speeds up the time you get paid for completed work.
Top tip: late payments can really slow your cashflow, causing your problems down your supply chain. You can keep an eye on which of your customers are on a good payment streak and who might be getting into trouble by running company checks.
Secured Finance
A secured business loan could be the option for your business if you have high value assets.You could free up some cash from your balance sheet, as the lender will secure the loan against your existing assets - think hard assets, like vehicles or machinery.
Alternatively, if you’re looking to purchase a new asset, such as a new vehicle, you may be able to borrow funds with the loan secured against the asset. This means interest rates are typically cheaper, as there is little risk to the lender.
Merchant cash advance
For businesses trading less than 1 year, or those with a low credit score, it can seem options are limited. A great alternative to working capital loans is a merchant cash advance. This type of business loan is designed for small businesses (a business with less than £1.3m annual turnover) that take payments from customers through an Electric Point of Sales system (EPOS). The monthly repayments are taken from a percentage of the sales through the card terminal. This is an exciting form of finance for seasonal businesses, as your repayments are based on the sales of each month, making repayments much more manageable.
Turnaround time for merchant cash advances can be very quick (as little as one day!) and generally does not require additional security.
How can I find out my options?
With so many different lenders - currently over 360 in the uk market - it can be daunting to know which direction to go in.
With the business loan calculator you can get an accurate idea of what loan you could get, without applying or submitting a soft search. The calculator will also show you what the monthly repayments your business will have to pay back will be, so you can get a clear idea of whether this will be a manageable option for your business.
Get started and use the business loan calculator for free today.
I’m ready to apply for a business loan
Once you have explored your options and when you’re ready to take the next step, you can apply by letting us know a few more details about your business and funding need. You can also connect with a funding specialist who will work with you and guide your application in the right direction. You can upload any necessary documents and track your application progress from your Capitalise account. With this simple process, you could receive the funds in as little as 48 hours.
Using a third party can streamline the process and take the workload of searching through business lender sites off your hands. With Capitalise for Business, you will have a funding specialist to guide you through the process, carefully selecting up to 4 lenders that will most suit your needs. This means your business credit score won’t have unnecessary hard searches, and you only need to send your information once. You can even track live updates from all lenders, in one place!
Updated 13/07/2023.
