Running a successful business often requires access to capital, whether it's for expansion, covering day-to-day expenses, or seizing new opportunities. If you're a business owner, securing a business loan can be a valuable financial tool. However, navigating the world of business loans can be complex, and making informed decisions is crucial.
Here’s everything you need to know when seeking a business loan.
Understand your business needs
Before you start to apply for business loans, it's essential to first identify the specific financial needs of your business. You should determine why you need the loan and how it will benefit your business as this will help you determine the kind of loan and lender that will suit your business, how much you might need and how quickly you need to receive the funds.
Common reasons for getting a business loan include:
- Working capital to cover day-to-day expenses, pay employees, or purchase stock.
- Expansion, opening new locations, launching new products, or entering new markets.
- Equipment purchase, acquiring machinery, vehicles, or technology to improve efficiency.
- Cash flow management, to bridge gaps in cash flow during seasonal fluctuations or unexpected expenses.
Choosing the right type of business loan
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 can be used to access a substantial amount of funds at once. The repayments are a fixed amount each month, spread across a number of years, making them more manageable. Long term business loans can be used for purchasing high value equipment or assets, investing into new areas of the business and expansion. These types of loans can be suitable for strong businesses with 2+ years of trading history, a good business credit score and demonstrated profitability.
Short term loans
Short term business loans provide quick access to capital if you need to address immediate financial needs. Short term loans have a short repayment period, often ranging from a few months to 2 years, making them a convenient option for businesses seeking to cover expenses such as stock purchases, payroll, or unexpected emergencies, without committing to long term debt. Short term business loans will have fixed repayments each month, so if you’re looking for predictable cash flow and a short term solution, this could be a good option for your business.
Merchant cash advance
Merchant cash advances can be used by retail businesses and companies that take payment through a card terminal or electric point of sale. They are a type of alternative business loan where a company receives a lump sum of cash upfront, in exchange for a percentage of its future card sales until the loan is repaid. The amount you can access with a merchant cash advance is typically 1.5 x monthly turnover from card sales. This means it might not be suitable if you’re looking for a large amount of funding. However they can be a great option if you’re a seasonal business as the repayments work in line with your sale fluctuations.
Asset finance is a type of loan that allows businesses to use and acquire assets, such as machinery, vehicles, or equipment, without making a large upfront payment. Instead, businesses can buy an asset through leasing, hire purchase, or contract hire, allowing them to spread the cost over time while gaining access to the resources needed to support their business.
Invoice finance allows you to borrow money against outstanding invoices. If you work with other companies and find your cash flow is strained by long payment days from your customers, invoice finance could be a suitable option. There are different types of invoice finance, including selective invoice finance, invoice factoring and invoice discounting. Which is right for your business will depend on whether you want to retain ownership of your credit control and whether you want to borrow against all of your debtor book, or only some invoices.
Revolving credit facility
A revolving credit facility allows businesses to access a pre-approved line of credit. You can dip into the funds as and when you need, so it can be great if you need to access cash quickly. The business can repeatedly draw funds up to the specified limit, repay them, and then borrow again, making it a versatile and flexible option for managing short-term cash flow fluctuations.
Property finance allows businesses, or individuals, to purchase, develop and invest in property for commercial purposes.
Bridging loans are a type of property finance that 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 quickly.
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, so will be suitable if you have sufficient funds.
Development loans are a type of property finance that are used to carry out the construction and renovations of a property. These types of loans are suitable for businesses or business owners with experience in property development.
If you’re looking for a business loan, make sure to choose the right type for your needs. This will help to improve your chances of being approved and ensures the repayment methods work best for your business.
Preparing to apply for a business loan
If you’re considering applying for a business loan, take the following steps:
See how much you could borrow
Lenders will have specific criteria that will help them to assess whether they can offer you a business loan, and how much. Use the business loan calculator to see how much you could borrow.
Check your business credit score
Your business credit score will play a significant part in whether you get approved for a business loan. Before applying for a loan, check your business credit score to see if you’re in a strong position to get an approval. When you login in to your Capitalise profile, you’ll be able to see your credit score as well as the factors impacting it, so you can take steps to improve it if needed.
Organise your documents
Lenders will require some documentation for your business loan application. You should gather your financial statements and last 6 months business bank statements.
Once you have an idea of how much you can borrow using the business loan calculator, you can search for funding using your Capitalise profile. Just tell us a bit about your business and a funding specialist will help you determine which type of loan and which lenders will be best for your business. They’ll let you know which documents you need and put together a loan application for up to 4 lenders, so you can find a business loan for your company.