Many people think the process for applying for a business loan is the same as that of a personal loan. Whilst some of the same principles may apply, business loan applications tend to be more in-depth, not surprising given that they’re generally for larger amounts and therefore come with a much higher risk for lenders.
Lenders typically consider factors such as the length of time the business has been operating, profitability, cash flow, business credit rating and current assets. Therefore, it’s important to present your best case when applying.
How can I ensure success for my business loan application?
1) Create a compelling business plan.
A good business plan demonstrates to the lender that you understand your business model, the market in which your company operates and what it’s capable of achieving in the future, with the right funds.
Lenders will be interested in upcoming trends that might positively and negatively impact your profitability. Consider including information on your competitors and how you differentiate your business offering.
They’ll also want to know who runs the business, including the owners or directors and other key staff that are likely to impact growth. Having a good team behind you will demonstrate how well your business can react to unforeseen circumstances or business demands.
You’ll need to include your business’ historical and projected financial information and demonstrate what the loan will be used for, and how it will be repaid. Lenders will need to know you have clear goals in place for the growth of the business, and in what timescales.
Be sure to include information about your current assets and liabilities, an executive summary and table of contents, plus appendices where relevant such as charts or graphs, marketing material or product information.
2) Get your paperwork in order.
Not every lender has the same criteria, however, typically they’ll expect you to provide the following paperwork:
- Business tax returns
- Business profit and loss statements and balance sheets
- Minimum two years’ worth of business bank statements
- Personal tax returns for the business owners
- Personal assets and liabilities
- Proof of address and ID
Lenders may also ask business owners to take out insurance to ensure the loan is repaid in the event of injury, illness, or death.
3) Know your lenders.
Most lenders provide details about their products and eligibility criteria on their websites. Before making an application it’s good practice to do your research. Certain lenders may be better suited to your business type or industry or have more favourable criteria.
If you don’t have time to do the research yourself, using a broker can be an easier way to apply. In fact, out of the hundreds of commercial lenders in the UK, around 50% of these only accept applications from a broker. Brokers will know the application process inside out and also provide you with invaluable knowledge about lenders’ requirements.
4) Understand the detail.
Loan applications are often rejected because business owners do not have a clear vision for their company or fail to understand the numbers.
As a business owner, you’ll be expected to know your finances if questioned. You also need to understand the market you operate in, in-depth, such as who the key players are, upcoming legislation changes and other factors that might impact what you do – now and in the future. It’s useful to have prepared market research or conducted an environmental analysis so that you’re able to answer any queries with authority.
5) Check your business credit score.
For UK businesses, the way to check your credit score is through a Credit Reporting Agency such as Equifax or Experian. Businesses are given a credit score ranging from 0 to 100. 0 represents a high risk, while a score of 100 indicates a very low financial risk.
It’s good practice to check your business credit score regularly. Factors such as paying suppliers and filing business accounts on time can have an impact.
6) Be honest.
When it comes to loan applications, it can be tempting to embellish figures or other information to make your business look more appealing to lenders. However, if you’re found out then it could decrease your chances of being successful and affect your business credit score. If there’s something in your paperwork that might cause a red flag, have an explanation prepared and know what your business can do to mitigate the issue.
7) Ensure your personal finances are in order.
Whilst a business loan relates entirely to your business, it’s not surprising lenders might also want to know who they’re lending to, on a personal level. The state of your own finances gives some indication to lenders as to how good you are with money. This is particularly important if you’re running a recent start-up and don’t have much by way of historical financial records for your company yet.
Experian rates an excellent personal credit score as 881 to 960 (out of a possible 999), and a fair or average score between 721 and 880. Anything lower than this and your personal finances could come under scrutiny by business lenders. Paying your bills on time, paying off existing debt and registering to vote can all help improve your score. Remember – other individuals you’re linked to could affect your rating.
Whilst there are no guarantees your business loan will be approved; these best practices will help increase your chances of success. It all might seem like a lot of work; however, it will stand your business in good stead for the long term.
Disclaimer: The views expressed in this blog article are those of Origin Finance and do not constitute financial advice.