Many small businesses rely on an injection of external funding to either start up in the first place, or to reach that next level of growth.
The business finance market has drastically changed in the last decade. Where once the only real option was asking the bank manager, there is now a wide variety of alternative finance lenders, offering quite an impressive array of products.
This means you have many more options to choose from when looking for a business loan, and therefore a higher chance of finding a product that is suited to your circumstances.
But how do you decide which business loan is best and what do you need to apply? Here are some tips to get you started.
Choosing a business loan
There are some key factors to consider that will help you start to narrow down the search for a business loan.
Interest rates: You’ll want to know how much your loan is going to cost you and will probably look at headline rates as a large part of your decision-making process. However, it’s important to remember that it’s not all about the headline rate. You need to understand how this is worked out – is it APR or a monthly rate, for example? What’s the term? Are there any arrangement fees which will impact the cost of the finance overall?
Term: The term of the loan also factors in how much it costs, as a higher rate might work out cheaper in total over a shorter term. Or maybe you’re willing to pay a bit more in interest in exchange for being able to extend the loan over a longer period.
Flexibility: What you need from a loan may also influence the type of product you choose. For example, you might need finance quickly, or you might only need it for a short period of time. In these instances, it could be that something else entirely offers a more flexible and workable solution, rather than a loan.
What a lender is looking for
There are other elements of applying for a business loan that will be out of your control; these essentially come down to a lender’s appetite for risk and the level of risk they think you represent.
Lenders often use ‘risk profiles’ to categorise applicants and will determine eligibility within these loose profiles. Interest rates will usually be determined on a case by case basis, depending on the perceived level of risk you represent.
Of the lowest risk will be businesses with clean personal and business credit, good profit evidence and a decent trading history of five or more years. Then there’ll be businesses with a good picture recently but perhaps some historic issues, followed by those with recent problems such as missed payments or CCJs.
As well as affecting the rate of interest you might get, this could also determine whether you are eligible for unsecured or secured loans.
What you’ll need when applying for a business loan
The information you’ll need to show a potential lender when applying for a business loan is pretty obvious, but the better it’s presented, the higher your chances of success are, so it’s worth putting the effort in. For example, a box of random invoices and receipts will not look as good as detailed charts and graphs pulled from your accounting software.
Lenders will generally ask for:
- Turnover and profit
- Bank statements
- Filed accounts
- Loan amount versus turnover
- Trading history
- Payment history, including any CCJs and missed payments
Generally, applicants should apply for a loan amount that is less than 25% of annual turnover, have a profitable business, not have any outstanding CCJs or late payments and be able to demonstrate 24 months’ trading history – although the last one isn’t always relevant, depending on what you’re applying for. It could be that you’re looking at a start-up business loan for example.
You might find that comparison tools or match-making platforms, such as our sister company Funding Options, can help you find the right business loan for you. Funding Options has been chosen by the Government-approved Business Bank to help businesses find finance.