Most companies, whether large or small, start-ups or established firms, will need a cash injection at some point in their business journey. There are a variety of ways that businesses can get funding, and this article will look at what it takes to get a small business loan, by covering the following steps:

  • Types of small business loan
  • Review your credit and risk
  • Get your financial proof in order
  • Be prepared for questions
  • Applying for the loan

Types of small business loan

There are many types of lending available to small business owners. Before applying you should have an understanding of why you need the money and be able to make an informed decision on the best type of lending for your needs.

Merchant cash advance

This is a flexible type of finance, based on how much you make through customer sales. The lender gives you the agreed amount of cash upfront and you repay it via a percentage of your overall card sales.

Term loans

A set amount of money is paid back over a set time period, through monthly instalments. These can be secured or unsecured:

  • Secured: the loan is backed up by a valuable business asset as ‘security’, potentially your business premises or a vehicle. If you fail to repay the loan, the lender can then seize the asset as repayment.
  • Unsecured: this type of loan requires no ‘security’ but lenders may ask you to sign a guarantee where you will be personally liable for the debt or use a guarantor who will take on the debt if you can’t.

Revolving credit facilities

This is a flexible finance facility that allows you to dip in when needed, and you only pay the interest when funds are used – very similar to how an overdraft would work on a personal bank account.

Invoice financing

Invoice financing can be used to ease cash flow issues. If a client has not paid an invoice on time or you need the money quicker than they can provide it, an invoice finance lender will give you the total of the invoice and you pay it back with interest. 

Business credit card

Business credit cards give you the flexibility to access cash as and when you need it. They have the added benefit of building up a good business credit score when used properly.

Start-up loan

You can apply for a start-up loan through HMRC for up to £25,000 if you have been trading for less than two years. However, this is unlike a business loan, as it is an unsecured personal loan. This means you will be personally liable for the debt and credit score consequences, and you won’t use an asset to be your security in the event you can’t repay the loan. You can pay back over 1-5 years and it has a fixed 6% interest rate. You can find out more on HMRC.

Review your credit and risk

To gauge and improve your eligibility, take a look at your own credit history, as well as the business’. Credit can be affected by personal or company credit cards, loans or contracts you have taken out. Tools such as Experian or ClearScore will help you tidy up your credit file. 

Review your business’ current cash flow and any outstanding debts. An accountant will be able to help you with thorough cash flow forecasts to ensure that you will be able to manage the loan repayments as well as existing debts. 

Lenders will also look at your business assets and time in business. They will be more favourable to a business that has been trading for several years, has established assets (to potentially secure the loan against) and a stable place in the market.

Get your financial proof in order

When creating a business plan you may have already compiled detailed financial information. Generally, when securing funding your business plan will be the first thing an investor will ask to see. Lenders may not need the full plan, but they will need the financial data.

You will likely need to provide:

  • A balance sheet
  • Income and loss accounts 
  • Cash flow records and projections
  • Profit and margin reports

It’s wise to have an accountant support you in pulling together these documents if you don’t have a full view of your finances already.

Be prepared for questions

There are a variety of questions that a lender may ask before deciding to lend to your small business. First of all, they will need to know how much the business is looking for, and what period of time you want to pay it back over.

Then consider your security or guarantee. What is the asset that you will use to secure the loan against, if seeking a secured loan?

Lenders will also ask what you are using the loan for and you need to be specific. This could be an investment in your marketing or developing a new product. Try to be specific about the amounts of money that will be directed to each area, for example, the price of any equipment you are purchasing or the costs involved in securing and storing more stock.

Applying for the loan

Once you have researched the lenders you might use, find the forms you will need to apply. 

Read through the form first, to find out what documents you might need to attach to the application, to save getting stuck halfway through.

Consult your accountant for any documents or figures that you don’t have to hand. An accountant may even help with applications or submit them for you, but it’s always best to check that everything is filled out correctly with an expert.

Online applications may tell you if you are eligible right away, but receiving the money might take days or weeks once your financial and business information is reviewed. Paper applications may take longer to process and be manually audited by accountants before you are accepted and the capital lands in your pocket.

How Countingup can run your financials smoothly

Now you know what it takes to get a small business loan, make your bookkeeping simple by trying the business current account with built-in accounting software today.  

Save hours of admin with instant invoicing, automatic expense categorisation and live cash flow insights. Find out more here.

Related Resources

Read more