Business finance

Applying for a business loan

Thinking of applying for a business loan? For most business owners, it can be incredibly difficult to know what type of loan to go for. Secured or unsecured, a term loan or a line of credit, with a fixed or variable interest rate. Or maybe it is something more specific you’re looking for, like equipment or trade finance.

And if finding the right solution isn’t complicated enough, getting everything together to submit the application can leave even the most prepared business owners in a daze.

Here is our guide to making sure you’re ready to apply for the right loan for you at the right time.

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Make sure you have your ducks in a row

Different types of businesses require different types of loans. Follow these steps to understand what is right for you.

Understand why you need a loan

What is the purpose and what will you use it for? Is it for a big investment like equipment, or is it for working capital? A business plan and cash flow projections will help here.

How much do you need?

Use your financial projections to firstly work out how much you need to borrow - it’s important not to borrow too much. You’ll be paying interest on funds you don’t need.

What can you afford?

And then use those projections to calculate what you can afford to repay. It’s extremely important to get this right. You don’t want to cause undue cash flow pressure, but you also don’t want to be burdened with a loan for too long.

What type of financial product?

Decide which type of funding is right for you. A term loan or a line of credit? Is the loan secured or unsecured? Fixed or variable interest rate?

Compare, compare, compare

Get multiple quotes, speak to the companies you’re considering and compare a few options. Get expert advice if possible.

Read the T&Cs

Make sure you understand the fees and charges. Read the small print and reread it.

Get the paperwork ready

Don’t submit your application until everything is in order.

Documentation checklist

When applying for a loan, financiers will need to know everything they can about your credit history and financial situation. It’s really important to get as much documentation together as you can before you apply. Without these, the business loan application could be delayed or even rejected, which could cause a black mark on your credit rating. You'll need:

  • Financial statements (at least 12 months) and your balance sheet
  • Proof of individual income
  • Statements (both personal and business) from transaction accounts and credit cards
  • Identification
  • A business plan or cash flow projection. Particularly for small businesses or start-ups, who can’t show a full year of financial records

It’s also good to have a clear plan of how you intend to use the funds

Try to avoid making these mistakes

And here some traps that business owners can easily fall into when looking for finance:

Not being adequately prepared

A potential borrower can get rejected because their documents are not in order. Understand the lending criteria and have your paperwork in hand before applying. As mentioned, a rejection can have an adverse effect on your credit rating.

Not matching the term of the loan to the purpose

Really consider what you’re using the loan for and select the types of funding accordingly. You don’t want to left paying a loan for machinery that you’re no longer using.

Opting for the wrong type of finance

Research the options thoroughly. If you’re experiencing cash flow gaps from payment terms on invoices, then maybe it’s invoice finance you need. If you’re looking to buy some manufacturing equipment, then it probably isn’t.

Underestimating costs

Read those terms and conditions in detail. Understand the rates and any hidden fees. Get expert advice if you can.

Not having funding in place before you need it

If you’re already in a cash flow hole, then it’s not the best time to apply for finance. Get a facility in place before it's required. Lenders often won’t help businesses in times of crisis and anyway, it may take a month or more to receive funds.

Applying to an unsuitable lender

Research, make enquiries, read reviews and then research some more. Picking the wrong lender could be a costly mistake to make.

Not using your assets

If you have business collateral available, seriously consider whether you should apply for a secured loan. An unsecured loan will cost you more.

Paying more for a loan to get the funds fast

You’re in desperate need of cash right now. But rather than waiting for a bank loan, you opt for a lender with higher rates who offers the cash the next day. Could you have waited and got the better deal?

Is invoice finance right for you?

After considering the tips above, you might be wondering if invoice finance is right for you. After all, you’re reading this on the website of an invoice finance provider. Debtor finance is suited to the following businesses:

  • You’re experiencing cash flow gaps caused by payment terms on invoices
  • You supply another business with a good or service and after covering your costs you have to wait for payment
  • As a result, you’re finding that you don’t have the working capital to expand your business, pay your employees or fulfil orders
  • You’re a small or medium-sized business
  • You’re not looking for a long-term loan to cover a large investment
  • You invoice other businesses on completion of work

Disclaimer: always refer to professional advice. The information presented here is purely indicative and not intended as advice. Always consult a legal or finance professional.

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