1 year ago

Small Business Loans Guide

Small business loans can make a big difference. You may need a cash injection to achieve growth or a loan to start a business, such as a startup loan. Whatever you need a business loan for, if you want to learn more about the process, you've come to the right place. This guide explains everything you need to know about small business loans, from applying to making repayments.

Why is Your Business Considering Small Business Loans?

The first step in finding the right loan for your business is to consider why your business needs additional funds. Do you need short-term finance to improve cash flow or a long-term loan to fund a business investment? Once you know why you need the loan, you can search for a lender that provides the required funding.

Business Loans to Improve Capital or Cash Flow

If you need to improve working capital or short-term cash flow issues, the most suitable forms of lending will be lines of credit, credit cards, overdrafts or invoice financing. These loan types can provide access to flexible finance that meets your business requirements, with repayments based on your income levels and borrowing amount.

Large Expense Business Loans

A fixed-term loan or asset finance is suitable if you want to cover a significant expense. These loans are ideal for everything from renovations to purchasing new machinery. A long-term loan provides access to a more considerable amount and can be repaid over several years to suit your income levels.

Business Startup Loans

If you've got a solid business plan for your startup but need funding to get it going, consider a startup loan. Startup loans are tailored to meet the needs of small businesses, but you need to consider how realistic it will be to repay your loan. Before applying for a startup loan, we recommend reading our article on the '21 Steps for Starting and Growing a Successful Business Startup'.

Man researching on a laptopCompare Business Loans Lenders Before Applying

It's important to compare business loan lenders before applying to ensure you find the most competitive business loan interest rate available. Our comparison service makes this step as quick and easy as possible. We ask you a series of questions, such as how much you need to borrow, what you need to spend the funds on and what repayment period you require.

From your answers, we find you the best rate loan for your business from our partnered loan lenders. The prequalification questions will help us provide a list of likely interest rates and terms, so you know what to expect from each lender.

At BusinessComparison, we save you from manually checking each lender's criteria and loan availability. We've partnered with various loan lenders, from traditional high-street banks and online lenders to alternative peer-to-peer loan companies, helping you to find the best loan for your business.

How Much Can You Borrow?

Whatever you need a business loan for, it's crucial to ensure a lender provides you with the desired amount of finance. It's possible to borrow from £1,000 to £20,000,000 through small business loans, with repayment terms typically set to less than a year for smaller amounts to several years for large sums.

The borrowing amount and terms available to your business will depend on a lender's ability to offer a loan that meets your business needs. You also need to meet the eligibility criteria of the lender. Because we ask you prequalification questions as part of our comparison service, we take the hard work out of finding the right lender for your business.

Cash BalanceHow to Apply for Small Business Loans

Once you've found a loan that meets your business requirements at a competitive rate, you can begin the application process. Applying might seem daunting, especially if it's your first time applying for small business loans, but it's pretty straightforward.

Prepare Your Financial Documents

Each lender requires certain documents as part of their application processes. These documents can include your monthly turnover, copies of your annual filed accounts and a detailed business plan. Having these documents ready at the start of the application process will save you time and significantly reduce the time it takes them to approve your application.

Create a Business Plan

You may need to produce a business plan, depending on the type of loan you need. A comprehensive business plan can take some time to complete, but it is an excellent way of providing the lender with an insight into the business and your plans for the future. You should show that your business can comfortably afford the monthly repayment amounts.

Explaining in detail how you plan to use the loan and the growth you anticipate can help to alleviate any concerns the lender may have.

Consider Why Your Loan Might be Rejected and Prepare

The most common reasons lenders to reject loan applications typically include the following:

  • Low credit score

  • A short period of credit history

  • Poor business performance

  • Insufficient security to cover the loan

  • Already owing too much to lenders.

Consider whether these reasons apply to your business, as you may be able to improve your chances of being granted a loan by resolving these issues before applying.

If your business doesn't have a strong financial history or struggles with a poor credit rating, you may need to provide a personal guarantee or security for the loan amount.

A secured business loan uses your assets as collateral if the loan falls into default. Valuing any assets you can provide as security will help the lender process the application and could improve your chances of being accepted.

Apply for Your Business Loan

Once you've found the loan that meets your business needs, you can start the application process. Although the loan application process varies between lenders, you'll be asked similar questions to those in our finance finder tool. You'll also likely need to provide the documentation we've listed above.

What Happens After Applying?

Upon submitting your business loan application, the lender will conduct internal checks to decide whether you are eligible for a business loan. If approved, you'll likely encounter one of the following outcomes:

  • Your application is considered high-risk

    You'll probably be offered a loan with a higher interest rate and a shorter repayment term so the lender can recoup their funds quickly and reduce their risk.

  • Your application is considered low-risk

    Your business will benefit from a low-interest-rate loan offer with the potential for a flexible repayment period.

When you receive your loan offer, you should diligently read the terms and conditions before signing and returning any documents. It's essential to do so, as there may be additional fees for the finance arrangement and the loan agreement duration. If there is anything which you do not understand, we are always available to discuss the terms so that your business does not suffer from any unexpected costs.

If the lender rejects your loan application, you could consider an alternative lender. However, it's essential to consider why your loan application was denied, as you may experience the same outcome applying elsewhere.

How to Repay Small Business Loans

Although this step will come after completing your business loan application, you may still need to set up the repayments. In many finance agreements, you repay your loan in fixed monthly or weekly payments. However, loans such as invoice financing or merchant cash advances will depend on your specific income dates.

It may be possible to repay the loan early to reduce interest charges, especially if the lender will not charge penalties for early payment. Early repayment could reduce the financial pressure and leave your business free from debt by an earlier date.

Compare the Best Small Business Loans

At BusinessComparison, we make it easier to find, compare and apply for small business loans. It only takes a few minutes to find out what's available to your business, so click below to compare today.

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Jon Cole-Dalton