How to get a business loan

Understanding business loans

A business loan is a type of borrowing, designed to provide companies with access to capital. It essentially acts as an agreement between your business and a lender where the lender provides your business with a specific amount of money, and in return, your business agrees to repay the borrowed funds, usually with interest, over a predetermined period.

What are the steps to acquire a business loan?

There are a few steps you’ll need to follow to be able to get a business loan. This process is different to acquiring a personal loan as lenders will require a detailed assessment of your business’s financial health and growth potential. Here’s a step by step guide to how it works:

1. Understand your business needs

Before diving into the loan application process, you'll need to have a clear understanding of why you need the funds. Are you looking to hire new talent, invest in marketing, expand your product line, or purchase new equipment? This will help you to determine how much you need to borrow and can help you plan ahead.

2. Assess your creditworthiness

Lenders rely heavily on your business credit score to evaluate your eligibility. A good business credit score indicates to lenders that there is a low risk of your business defaulting on the loan. This means they can offer reduced interest rates. Lower interest rates make the loan more manageable and cost-effective over time. On the other hand, a low credit score can restrict your loan options and lead to higher interest rates due to the higher perceived risk of default.

3. Find out your business lending options

There are hundreds of business lenders in the UK, all offering a wide variety of finance options. How your business operates and what you need the loan for will impact which lenders might be best suited for your business.

When you search for a business loan with Capitalise, you’ll receive dedicated support from our team of experts. They’ll match you with lenders that will be best suited to your needs and most likely to approve you for a business loan.

4. Understand how much you can borrow

You’ll need to find out how much your business will be able to borrow before you start applying. This ensures that your expectations are in line with what you could be eligible for and allows you to consider how much could be comfortable for your business to afford in repayments each month.
You can use a business loan calculator to see how much you could borrow and understand what your monthly repayments could look like.

5. Gather loan application documents

Lenders will require various documents to assess your business's financial health and come to a decision on your business loan application.

You should gather the following documents so that you’re prepared to apply:

6 months business bank statements
Most recent set of company filed accounts
Details on what your business does and what you want to use the funding for
Depending on the type of business loan, you may also need to gather documents such as your aged debtor report, or your electric point of sales (EPOS) statements.

6. Complete your business loan application

Now it's time to submit your loan application. You should be prepared to answer questions about your business, provide financial details, and explain your plan for using the funds.
Completing the application accurately and providing enough details will improve your chances of approval. The quicker you can get all the information that the lenders require ready, the quicker you will be able to access the funds you need.

What can you use a business loan for?

There are a variety of reasons a company might seek a business loan, including:

Working capital to cover day-to-day expenses
Business expansion
Purchasing equipment, machinery or vehicles
Purchasing, renovating, or expanding commercial properties
Refinancing multiple existing loans
Purchasing more stock
Investing in marketing campaigns and advertising
Upgrading or implementing new technology, software, or systems
Funding research and development projects
Recruiting and training new employees

What type of business loans are there?

There are various types of business loans available, each are tailored to different business needs. The different types of business loans are:

Long term loans

Long term business loans offer a substantial sum with fixed monthly payments over several years, making repayments manageable. These types of loans can be suitable for strong businesses with 2+ years of trading history, a good business credit score and demonstrated profitability.

Interest rates for long term loans are usually lower. The exact rate you’ll be offered can vary depending on creditworthiness and the market conditions at the time of the loan agreement.

Short term loans

Short term business loans provide quick access to capital with short repayment periods, perfect for covering immediate expenses like stock, payroll, or emergencies. The interest rates on short term loans are often higher than long term loans due to the shorter lending period.

Peer to peer loans

Peer to peer loans connect borrowing businesses with multiple investors through an online platform. These loans offer businesses an alternative source of finance and can be used for almost any business purpose.

Interest rates on peer-to-peer loans can be competitive, as they are determined by the market dynamics of the lending platform.

Merchant cash advance

For retail businesses, a merchant cash advance offers upfront cash in exchange for a percentage of future card sales. The amount you can access with a merchant cash advance is typically 1.5 x monthly turnover from card sales.

This type of finance doesn’t have a conventional interest rate. Instead you’ll get offered a factor rate that determines the total amount you will repay.

Invoice finance

With invoice finance you can borrow money against outstanding invoices. Options include selective invoice finance, invoice factoring, and invoice discounting. Which is suitable will depend on whether you want to retain ownership of your credit control and if you want to borrow against all of your debtor book.

Interest rates for invoice finance are often influenced by how risky your invoices are perceived to be, which includes factors like your customers' creditworthiness.

Revolving credit facility

A revolving credit facility provides access to a pre-approved line of credit as needed, giving flexibility for managing short-term cash flow fluctuations. The business can repeatedly draw funds up to the specified limit, repay them, and then borrow again.

Interest rates on revolving credit facilities are typically variable, linked to market rates.

Asset finance

Asset finance allows businesses to acquire assets like machinery or vehicles without a large upfront payment through leasing, hire purchase, or contract hire. Usually, the loan is secured against the asset being financed.

Interest rates for asset finance depend on the type of agreement and the asset's value but are generally competitive.

Property finance

Property finance works similarly to asset finance, with the loan being secured against something valuable. It allows businesses, or individuals, to purchase, develop and invest in property for commercial purposes.

Bridging loans are short term and used to bridge the gap between the purchase of an asset and securing a longer term solution. They can be useful if you’re looking to buy a property at auction, or need to finish a development project. The interest rates on bridging loans are usually higher due to their short term nature and the risk involved.
Commercial mortgages are used to purchase property with repayments spread over a longer period. A commercial mortgage will require a business to have at least a 25% deposit. Interest rates for a commercial mortgage are usually much lower than other business loans as it is secured against a valuable asset.
Development loans are a type of property finance that are used to carry out the construction and renovations of a property. Interest rates on development loans reflect the project's risk and duration, which means they are typically higher than conventional property loans.

Secured vs unsecured business loans

Business loans can either be secured, or unsecured. Secured loans require something valuable, like a property or equipment, as collateral. This means that if your business can’t pay back the loan, the lender can take the collateral to recover their losses. Unsecured loans don't require any collateral, but usually have higher interest rates because they can be riskier for the lender.

How long does it take to get a business loan altogether?

How quickly you can get a business loan will depend on the type of loan and the lender that you choose to apply to. Generally, larger amounts and more traditional lenders, such as high street banks, can take longer approval times as there are more steps involved in their review and approval process

Which type of business loans are quicker to get?

Unsecured business loans tend to be a quicker option as their approval is based on factors such as the business’ financial position, their cash flow and business credit score which can usually be done through an online platform.

With Instant Offers available on Capitalise, you could receive an instant decision and receive funds in as little as 48 hours.

Which type of business loans can take longer?

Secured business loans often take longer as the lender will need to value the asset or assets being used as security.

If you’re looking for a commercial mortgage, you can expect it to take a few months or more to secure the funding. This is because there will be more parties involved in the process, such as surveyors and solicitors which could all cause delays.

Large business loans ( £250,000+) could also bring longer approval times as the level of risk for the lender is higher, so they will have more stringent review processes.