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.
Latest Insights
Are you thinking of taking the leap and buying a business?
Buying an established business can be an attractive option for many, as you’ll be purchasing a known quantity with historical records of profitability to help with forecasting and putting a business plan together. What’s more, you’ll start with an existing customer base as well as having assets and staffing already in place.
You’ll also likely see cash flow from day one and save on many of the outlays from starting a new business from scratch. You may even already have an in-depth knowledge of the day-to-day running of the company if you are part of the existing management team (and are considering a buyout). It can also be easier to get finance for buying an existing business, as you’ll be able to show financial records that attest to the viability of your venture.
For those who have decided to buy, we answer some commonly asked questions about the finance options available for acquiring a new business as well as for management buyouts.
What’s the difference between an acquisition and a management buyout?
An acquisition is when you buy a business by purchasing most, or all, of its shares to gain a controlling interest. A management buyout (MBO) is also a form of acquisition, except that it’s when the business is bought by the company’s existing management team.
A management buyout can be an attractive option for several reasons. Not only does it save going to market and disclosing potentially sensitive information, but the managers will intimately understand the company’s workings. This means that the seller can leave with the comfort of knowing that things will be left in good hands for the future, resulting in a smooth transition that’s beneficial for all involved.
The main obstacle for management buyouts is that the managers may not necessarily have the resources or funding to buy the business. This can also be an issue for business acquisitions. But there are tried and tested options available.
How do you get an acquisition or management buyout loan?
There are several routes available if you’re looking to buy a business, and these are available even if you’re not an experienced business owner. Options include:
Business loans
One of the most common ways to finance an acquisition or buyout is through a business loans, which allows you to borrow up to £2M for buying a business.
Equipment refinance
Another option for asset-rich businesses is using equipment refinance to leverage their existing assets for a management buyout, which will allow you to release roughly 80% of the business’s current equipment value as working capital (you can carry on using the equipment while it’s on refinance).
Franchise finance
If you’re looking to take on an existing franchise such as a coffee shop or fast food restaurant, then there’s always the option of franchise finance, which can fund the entire franchise cost.
What other loans are available to help for buying an existing business?
Sometimes it’s not about raising the capital for initially buying a business, it’s about bringing something new to the table through modernisation or simply just giving things a refresh.
There are options available if you’re looking to fund new equipment, or even if you want to finance a refit of the existing premises (including building works and decoration so you can really make the business feel like your own). Wherever you need funding, there’s likely to be options available to help.
Can you get an unsecured business acquisition loan?
Where possible we try to provide unsecured loans for management buyout or acquisition loans. We do also have access to lenders who are able to provide secured business loans.
Examples of business acquisition loans
You can get financing for buying virtually any type of business you can think of. From dental practices and accountants to florists and hotels. Whatever you’re thinking of buying, we’d love to help.
How Origin Finance can help
As a specialist broker in acquisition finance, we have access not only to high street banks but also to niche and private lenders. This means that we can find financial support for virtually all of your requirements.
We’ll help you prepare the paperwork, ensuring that your application is as strong as possible.
Reach out for a free, no-obligation quote to find out how we can help secure funding for your acquisition.
Latest Insights
There’s never been a better time to start a new business. Last year we saw 774,420 new companies launch right here in the UK. That’s up 3.5% from 2021 and is 19% higher than just five years ago.
Starting your own business is a very large (but very rewarding) challenge that’s well worth undertaking. It’s also well worth starting to think about all of the financial options available to you, so that you don’t exhaust your cash flow too early, and to make sure that you’re well prepared for any bumps that you might face down the road.
One of the main hurdles entrepreneurs face is getting enough cash together to pay for the initial costs. Less than half of UK startups survive beyond their first five years, with the records showing that insufficient financing is the main reason for business failure among startups in 2022.
Virtually every business needs some level of finance to get going. Whether it’s for buying equipment, office space, or marketing, the costs for starting up a great business can really add up. And that can even be before your business has gotten off the ground.
Once you get going, you’ll also have to think about your ongoing cashflow to make sure that you’re agile enough to overcome any obstacles that crop up while you’re growing and building your financial stability.
Fortunately, there are several funding options out there to help you get your business up and running to the best possible start.
What are common options for financing new businesses or startups?
Some of the most common sources for financing new businesses or startups include:
- Equipment finance
- Fit out finance
- Business loans
- Invoice financing
- Vehicle finance
Each of these financing solutions caters to different needs and aspects of a new business, from purchasing the necessary equipment to setting up a physical location, managing cash flow, and acquiring vehicles for operations. Below, we explain each of these financing options.
Equipment finance
All tech firms need computers, as restaurants need ovens and manufacturers need machinery. As such, equipment finance is an obvious choice for starter businesses that need to buy equipment that’s essential to their operation to get going (without having to fork out on an initial heft investment).
And it’s not just for “tangible” assets like computers and desks, or tables and chairs – it also cover “intangible” assets like software, signage or even AstroTurf so don’t be afraid to enquire about equipment financing even if your business has some unique needs.
Fit out finance
When setting up a new physical location, fit-outs can be a big expense (even fit outs for small units can be pricey). Fit out finance helps new businesses by funding construction and renovation through monthly repayments as opposed to one big upfront payment – making things a bit more manageable. Like equipment finance, it covers both tangible and intangible items, making it a great option for a variety of business types, like shops, gyms and offices.
Business loans
Business loans are a go-to option for emerging businesses who are looking for a bit of flexibility with their funding. The money can be used for various things, from covering working capital and deposits to funding management buy-outs and acquisitions.
Invoice financing
Invoice financing essentially turns outstanding invoices into immediate capital.
Instead of waiting for clients to pay their invoices— which can take weeks or even months— a business can access a significant percentage of the money that’s owed.
Sometimes this can provide a new business with a lifeline, but it also gives a bit of financial stability generally and is therefore an option for helping to navigate the unpredictable early stages of entrepreneurship.
Vehicle finance
Vehicle finance, or commercial vehicle finance, allows businesses to purchase cars, buses, taxis, vans, etc – all of which generally have a large initial upfront payment.
Whether it’s for delivery services, employee transportation, or simply a company car, vehicle finance lets businesses acquire the vehicles needed for running their operations.
How Origin Finance can help
Starting a finance business can seem daunting, but it’s entirely achievable with the right financing options and support.
Here at Origin Finance, we’d love to support your new business venture. If you let us know what you’re looking to finance, we can help you to find the most suitable funding solution. As we work with over 120 lenders, each specialising in different industries, we’re able to find the most competitive finance products for your new business.
And our team won’t just look at your numbers; we want to understand the people and the ideas behind your business to learn more about what you do and why you do it. We have proven that a compelling business story will significantly increase your chances of securing business finance.
We also offer flexible payment terms, including seasonal payments for seasonal businesses, and the ability to spread VAT throughout the finance period. In addition, our partnerships allow us to provide finance for new, used, or refurbished equipment, with no deposit required in many cases.
Find out about our turn-key new start finance solution, or get in touch for a free no-obligation quote without affecting your credit score.
If you liked this article, you might also enjoy reading: