Are you thinking about having your first-ever retail or small business? While starting a business seems lucrative, it requires capital. Usually, small business owners lack sufficient funds to invest initially. Here, a small business loan can help kick-start your business. You can finance short- and medium-term needs with £25,000-£500,000 cash limits.
The amount one may need depends on the existing financial situation and goals. If you need to renovate the property, the amount will be low. However, you may need more if you need to hire and buy equipment with a complete office overhaul.
However, what is the process to get a business loan?
The blog details everything about business loan approval. If you’re applying for the first time, the blog may help. It discusses the requirements and the best tips to get a business loan approval in the UK marketplace.
What does a small business loan imply?
Small business loans are for startups, retailers, and small shop owners seeking cash flexibility. They are thus ideal for businesses with turnover below £2m and 50 employees across different sectors. They are a secured and unsecured way to finance critical business needs.
You may get up to £500,000 as an unsecured business loan for 10-25 years. The interest rates and the loan terms stay fixed. However, interest is charged throughout the loan period. It includes the loan term within which you skip the payments as well. Missing a repayment may affect your credit score and finances.
One must hold a verified business bank account to qualify. It should be the account you use to conduct business expenses and pay taxes. Alternatively, if you must provide a personal guarantee, the costs of the loan may be high. A lender may need one if the business lacks a credit score, consistent operating history and no potential projects.
What are the interest rates on a small business loan?
Interest rates on business loans may vary drastically in the UK marketplace. However, it is higher for the unsecured business finance. Interest rates may be fixed. It means they do not change until the loan term. Alternatively, you may choose a variable interest rate to benefit from economic fluctuations. Most business loan providers charge interest rates on the base rate.
It is the minimum rate below which a lender cannot lend. The current Bank of England base rate is 5.25%. Thus, the interest rates one gets depend on the base rate and other factors. It includes- credit score, operational history, revenue, client base, business plan, etc. Thus, there is no one-size business loan amount to qualify. You get only what you can afford to repay comfortably.
Choosing a secured loan or improving your credit score can reduce the costs of a small business loan.
Repayment terms, loan payments, and loan amounts also decide the interest rates. Here is an example of how small business loan costs work:
| Loan parameters | Costs (mentioned in Pounds) |
| Amount borrowed | 45000 |
| Monthly payments | 854.37 |
| Total interest costs | 6262.20 |
| Average monthly interest | 104.37 |
| The Total amount to pay | 51262.20 |
For example, you need £45000 for 60 months (7 years) at 5.25% interest rates to renovate the office space, the costs are as follows:Â
If you skip a monthly payment, the total cost rises to £51369.32. According to this arrangement, you pay £106.62 extra on every missed payment. Avoid this by exploring budget-friendly funding options.Â
Choosing the most affordable business finance for your needs is challenging. It involves comparing options, additional rates, fees and the genuineness of the lender. However, a reputed business loan broker may help you fetch affordable loans. A broker eliminates fears of dealing with the wrong guy or loan repayments. He enables you to file applications and work on aspects that reduce interest costs.
What purposes can small business loans help you with?
Business owners use external finance for multiple operational requirements. 70% of businesses use it for working capital improvement. It includes ensuring a top-notch working culture with access to comfort and technology. It includes aspects like- furniture, payrolls, hiring needs, etc. Here are other purposes that you can use the small business loan for:
| Improve cash flow in slow business season Businesses operating seasonally require finance to prepare for seasonal sales. It may include up-stocking products and production or logistics requirements. | Consolidating debt or debt clearance Businesses juggling with multiple debt payments may benefit from consolidation. It lowers monthly instalment amounts and makes debt manageable. |
| Staff and employee training programs In their growing stages, most firms help employees build the necessary skills for their own benefit and that of the company. This promotes profits and leaves room for employee upliftment. | Business expansion Most small business owners wish to scale quickly by expanding into the retail sector. To this end, they utilise additional finance capacity, which helps them transition smoothly. |
What are the eligibility and documents required to qualify?
Different business loan providers assess the individual business’s affordability using unique criteria. You may spot some document differentiation; it may confuse you. Here are the eligibility criteria and documentation requirements. It will help you know what to expect:
| Eligibility criteria for small business loans | Documents requirement |
| Should have a registered business in the UK operating for over 6 months or more | A well-detailed business plan stating business goals and revenue projections |
| Have at least £2m of turnover. You may get 25% of your turnover. | Bank statements, VAT, HMRC tax returns |
| Should be a registered limited company, sole trader, LLP | Company registration proof |
| Should have an active and relevant business bank account connected to a business address | Personal assets information in case of personal guarantees |
| You should have stable personal and business credit scores | License and permits |
| List of company directors and financiers | EEA Or EU identification card |
How can you get approval on a small business loan fast?
Most business owners do not get business loans. Some reasons are- wrong application details, unauthentic business registration, applying for an unaffordable amount, etc.
It affects the credit score and the possibility of getting a loan quickly. The following aspects are your keys to a quick small business loan approval:
Prepare financial accounts early
Up-to-date financial accounts are the primary aspect of securing a business loan quickly. It helps the provider analyse exact affordability. Company House provides 9 months to update accounts after a business year completion. While doing so, ensure:
- The updated accounts are not older than 6 months
- Provide management account in case of old accounts
Most accountants provide management accounts monthly or quarterly. Analyse and edit to finalise the accounts. It will help you understand and avoid obstacles to securing business loans.
Use a business bank account for related expenses
Most loan providers check business bank accounts for 3-12 months. Conduct every business-related expense through a business account. It eases the deal for the lender and boosts approval chances.
Alternatively, he does not consider a personal account for business purposes. If you have been doing otherwise, then stop it. Any payments you receive from clients should be credited to your business account. Inform your clients and provide the business account number for further credits.
Sometimes, other aspects make one seek instant cash options. For example:
Some business owners have a business account. However, clients delay the payment over 50 days. What if you need money urgently to settle a payment? Send a reminder and check the invoice finance facility. It helps you borrow against the pending invoice payments. However, getting around 90% value for your invoices is challenging. Here, an expert invoice finance broker may help with the correct value here. He quickly suggests one based on your loan purpose, industry, and expectations. It enables you to get instant cash without waiting for clients’ payments.Â
Improve business and personal credit scores
Personal and business credit scores form the base for business loan approval. Individuals with low expenses, a good ratio of debts to income and stable business finances qualify. However, most businesses only work on business credit scores and suffer rejection.
Thus, analyse both credit reports and inform agencies about errors. It boosts credit rating for business and personal credit scores.
Next, pay costly debts and settle pending cash payments to suppliers or employees.
You can also build your credit score by taking on more new projects, conducting business payments through relevant accounts, and avoiding major debt.
Provide a reliable personal guarantee
A personal guarantee is a person or asset that guarantees the loan repayment if one defaults. Yes, you may either pledge a director’s or your individual assets. In the former case, list the director’s net worth and asset holdings to get the loan.
The loan providers may demand one for businesses with low credit scores and troubled finances. Alternatively, businesses with good credit history do not need one.
If the loan owner cannot pay the dues, the lender may claim personal guarantees legally.
Avoid major shareholder changes
Any changes in the operational accounts, shareholdings or shareholders may obstruct loan approval. Constant equity switches make the company unreliable in the lender’s eye. Thus, avoid changing shareholders for at least 12 months. It also makes your firm unreliable in terms of ethical business practices.
Wrapping up!
Small business owners seek quick finance facilities to support short and long-term needs. They lack sufficient cash to meet the urgency. Here, a small business loan helps one with instant cash with repayment flexibility. You may use the loan for any official purpose. However, the eligibility and document criteria must be met to qualify. For more such informative articles, visit here.
