If you run a business and are exploring the finance options available to you, you might come across the term ‘pre-approved loan’. This article will help you understand what pre-approval means, how it's different from being fully approved, and why it might be beneficial for your business.
What does pre-approved mean?
A pre-approved business loan offer suggests that based on your business credit score and any additional information you have provided, your business meets a lender's eligibility and affordability criteria. It's important to understand that this is subject to final checks before the loan can be fully approved and the funds released. For instance, some lenders would require you to connect to your primary business bank account to verify your business’s turnover before they can proceed to a fully approved offer.
Are pre-selection and pre-approval the same thing?
A pre-approval (or pre-qualification) is not the same as being pre-selected for a loan. Being pre-selected indicates that your business meets at least some of the eligibility requirements set by the lender. Pre-approval, on the other hand, goes a step further by also assessing your ability to repay the loan, beyond just eligibility.
It’s important to note that if you are pre-approved, at this stage you cannot yet access or drawdown on any funds.
Does pre-approved mean the loan is approved?
No. While being pre-approved is a promising sign, it does not guarantee that your business will be approved or that the pre-approved amount will be the final amount available to draw down.
The initial terms of a pre-approved offer are based on the assumption that the information you have provided is accurate. However, a final loan offer can only be extended after the lender has conducted a thorough verification of your details. This verification process may also include a review of the director’s personal credit, depending on the lender.
How is a pre approved business loan different from a regular business loan?
Traditional business loan applications can be lengthy and can require you to gather multiple documents. You might find yourself uploading lots of bank statements, or digging out financial accounts. This means that you could go through the entire process only to find out you’re not approved, or that the approved amount is less than helpful.
Pre-approved loans offer a quicker insight into whether you’ll qualify, how much you could borrow and what potential rates you could get upfront, enabling you to proceed with a loan that fits your business needs efficiently.
What are the benefits of pre-approvals for a business?
Pre-approved loans simplify the lending process, offering significant advantages for your business:
- You gain immediate insight into how much your business can borrow, allowing you to plan your financial strategies more effectively.
- You’ll get a quick answer about whether you're likely to qualify for the loan, so you can make decisions faster.
- The application is straightforward, saving you time and effort.
- A faster approval process means that you can access funds quicker, which is great for when you need to cover costs or take advantage of opportunities without delay.
What factors might lead to a business being pre-approved for a loan?
There are a few factors that can influence whether your business gets pre-approved for a business loan, these are:
- Business credit score: having a good business credit score will generally increase your chances.
- Credit turnover: this is your business turnover as per the business bank accounts. A high credit turnover will likely increase your chances.
- Financial performance: Having a strong revenue and being profitable will help.
- Sector: some industries might be seen as less risky to lenders than others.
- Incorporation status: typically, incorporated businesses may be viewed as more stable.
How can you see if your business is pre-approved for a loan?
Interested in seeing if you're pre-approved for a business loan? You can instantly see if you’re pre-approved for a loan with Capitalise. Just log in or sign up for a free Capitalise for Business account.
What if you get pre-approved for a business loan, but don’t want to use it?
Being pre-approved for a loan does not mean that you’re obligated to proceed with it. It merely provides you with an option, allowing you the flexibility to decide whether or not to use the loan when your business is ready.
Do I have to draw down the full pre-approved amount?
No, won’t be required to draw down the full pre-approved amount. If you've been pre-approved for a business loan, it indicates the maximum you are eligible to borrow. But, if you choose to borrow less than this maximum, you are generally permitted to do so. However, there may be a minimum loan amount, which varies depending on the lender.
