There is an old saying that a bank will only lend money to people that don’t really need it.
There is an element of truth in this and obtaining the best loan for your business will always requires you to convince the lender of the strength of your business. This can either mean making sure you present your existing business in the best light possible, or, in the case of a start-up, capitalising on the potential of your business so you can get the best loan on terms that suit you.
There are lots of ways to obtain funding for a business – from government grants to angel investors – but getting a loan is still the most popular way for business to raise money. Finding the best business loan is only part of the battle, however. You’ll need to make sure your business is in the best possible shape and leverage its assets and performance to secure a larger loan on favourable terms.
Deciding to take out a loan is a big step for any business, especially for smaller enterprises and start-ups. Whether you need funding to cover any temporary cash-flow shortfalls, or to invest into your business to allow it grow and reach the next level, there are a number of considerations every prospective borrower will need to look at.
Of course, businesses will need to determine exactly how much they want to borrow, but this is only the start of the lending process.
Choosing your lender
Although a high-street bank may be the first loan provider that comes to mind, there are a number of other options that may be able to offer funding better suited to your needs.
You may want to use an online business loan marketplace such as NerdWallet, which is a one-stop-shop for business lending featuring high-street banks such as NatWest and Royal Bank of Scotland or innovators such as Spotcap, Esme and Iwoca.
1. Alternative Lenders
This umbrella term encompasses the variety of challenger banks and fintech lenders, including peer-to-peer platforms, which can now offer competitive loans to businesses. Over the last few years their popularity has risen among businesses looking for extra funding, partly due to schemes such as the Open Banking system. This means businesses can share their financial information digitally with prospective lenders, so enabling lenders to assess and decide on loan applications much more quickly than before.
These alternative lending options may be beneficial for a variety of small businesses, including those who have had loan applications rejected by mainstream banks. Banks often have stringent lending criteria and may be reluctant to offer loans to SMEs and start-ups who may be considered more of a risk, which could leave a significant number of people looking for funding elsewhere. This is where these new-style lenders may be able to help, although the interest rates could be slightly higher than those typically offered by banks.
Furthermore, some new-style lenders may give businesses the opportunity to check their eligibility for a loan in minutes. They can do this without performing any credit checks and so without it affecting your credit history.
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2. Banks and Brokers
For some businesses, taking out a loan from a bank may be a more suitable option than an alternative lender. Particularly if businesses are looking to borrow a considerable sum of money over a long period of time, banks may be able to offer funding where alternative lenders may not. Banks are also likely to offer competitive rates, especially if the business can offer security against the loan and has a clear business plan showing how they will make the repayments.
If businesses are uncertain about which lender is best suited to their circumstances, even after researching all the possibilities, then they may want to consider a broker. They can offer advice and information to help source a loan for businesses, although it is important to look at how much the broker charges and whether they are limited to finding a loan from a set selection of lenders.
How to get a loan for your new business
Whether you’re applying for a business loan from a high street bank or a personal loan for business purposes from an organisation such as Start Up Loans, getting a loan means having to make the most of your trading performance to date to convince the lender you’re a good investment.
1. Make the most of capital investment
As your business grows, it starts to acquire capital – either from other investors or from money that you’ve put into the business yourself. Capitalise on this – investors will be more confident if you’ve raised money from others or have invested your own money into your new venture.
2. Prepare a cash flow forecast and a business plan
Once your business has been trading for a year or more you can show potential investors your cash flow when applying for a business loan. Lenders will want to see evidence of a strong cash flow, as it shows your business will be able to meet the loan repayments. Create a three-year cash flow forecast – how you think your business will perform over the next 36 months – to convince a lender that your business can repay the loan.
A business plan is a pre-requisite for a successful loan application and to give credence to the cash flow forecast. Even though not all lenders may ask for a business plan, you must draw up a business plan :
- If you don’t have a plan for the growth of your business how are you going to convince a lender that their money is safe with you. If your plan doesn’t include a sales and marketing plan how will you know that your growth forecasts are going to be met. Your business will be much stronger and the loan more secure if you can demonstrate how the cash flow you are forecasting will be achieved.
- A business plan will help you to determine how much you need to borrow and show lenders how you will use the money.
3. Show your business’ collateral
While unsecured loans are preferable for a small business, they’re usually limited to lower loan amounts than secured loans. Unsecured loans, typically for less than £25k, are great for start-up businesses looking to get started or in their earlier years of trading.
Some lenders might be willing to offer a secured loan for a larger amount and over a longer term, if you have collateral to secure a loan against, such as business premises if owned by you, or assets such as plant and machinery.
4. Demonstrate your industry knowledge
Your business operates in a competitive environment, and against a backdrop of legal and government policies. Lenders will be reassured if you can show that you know what’s happening in your industry, what trends are emerging, and the potential market threats and opportunities that could affect your business. Include a SWOT (Strengths, Weaknesses, Opportunities and Threats) analysis of your business in your business plan and read up on market trends so you can show off your knowledge in the plan.
5. Get character references
The way you present yourself and show confidence in your ability to grow your business can have a big impact on getting a great business loan. Build a positive image of yourself as a business owner – such as obtaining endorsements from people you’ve done business with in the past.
Completing the necessary paperwork
The paperwork that businesses need to present when applying for a loan will vary according to provider, although there will be some similarities. Some documents can be submitted online, whereas others may need to be physical documents.
Applying for the loan
The time it takes to apply for a business loan and get it approved will depend on the lender you choose. A bank may take weeks to approve a business loan but, if a business uses an alternative lender, the loan could appear in their account within a matter of days or even hours.
Whatever lender you decide to apply to, it is important to make sure that it is the right one for you and your business needs. Although it might be tempting to choose the first provider you find that can offer you a fast loan, it is worth researching other options and making sure it is the most suitable choice for your current situation, and also for the future.
Businesses should carefully consider the terms of each loan agreement, such as any flexibility regarding payment and if you could extend the loan, as this may become significant in a few years.
In Conclusion
To return to where we started, the art of securing a loan is about convincing the lender that your business is a safe bet. The more information that you can provide to demonstrate the strength of your business and that you have a good plan to grow your business and repay the loan, the more likely your application will be successful.0
By Justin Charlton
Join the NoLimits Business Community
Are you a business owner looking to take your business to the next level? Join our innovative community of like-minded professionals and gain access to a wealth of valuable resources, including a community portal to chat with other business owners, ebooks, business development software, and growth events that will transform the way you do business. Best of all, these resources are completely free and will be available to you forever.
But the benefits of joining our NoLimits business community don’t stop there. By becoming part of our community, you’ll have the opportunity to connect with other business owners, share insights and ideas, and build valuable relationships that will help your business thrive. Don’t miss out on this amazing opportunity to supercharge your business and join us today!