How to Get a Business Loan

In the UK, 60% of new businesses fail within 3 years.

Whether it was due to a bad year or the economy, a loan can mean the difference between success and failure for your business. Without the funds to take advantage of new opportunities, you’ll quickly be beaten by the competition.

Starting a new business? Then you probably need help getting the capital to run it.

If you’re not ready to give up on your small business, read on to learn how to get a business loan.

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Why Get a Business Loan

If you’re unsure if a business loan is for you, there are several reasons to invest in a business loan.

Business loans are great for starting a new business, getting the equipment you need to run more efficiently, hiring on more employees to expand your business, or even just trying to improve your business credit score.

The truth is, it’s not always about being on the verge of going out of business.

*Click here to find out more about the government backed Recovery Loan Scheme.

Know if You Should Wait on the Loan

There are, of course, instances where waiting on getting a business loan is the best course of action.

If you already have terrible credit or are in extreme debt, adding to this debt can do more harm than good. Plus, when you’re in these conditions, it can be extremely hard to obtain a loan in the first place. If you do, the interest rates will be through the roof.

When a business seems bound to fail and your only plan of action is getting a business loan, chances are the loan won’t be enough to help and you’ll just worsen your debt.

It’s up to you or your professional accountant to decide when investing in a loan is worth it. Sometimes it’s best to wait for things to improve on your end so you can get a decent loan.

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How to Get a Business Loan

If you’re ready to start the business of your dreams or expand your current business, you’re probably wondering how to get a business loan.

Well, you’re not alone. Last year, almost half of all small businesses applied for financial help. That means getting the loan you need can be competitive.

That’s why it’s important to consider these keys areas.

1) Figure Out What You Need

The first step in getting a business loan is determining how much money you actually need. It’s easy to want all of the money in the world, but you have to remember that this is money you’ll need to pay off in the future. 

Having a plan that outlines exactly how much money you need and what that money will go towards will also increase your chances of getting a loan.

Be sure when calculating this number that you consider your operation expenses, real-estate costs, and how much money you plan on bringing in yourself.

2) Balance it Out With Your Debt Risk

As mentioned before, loans are essentially debt. Studies show that small businesses in the UK have been reaching record levels of outstanding debt in recent years.

Debt has the power to create personal stress and financial struggle, so you’ll want to determine your risk aversion and how much you can handle.

You can use a loan calculator to estimate how much your monthly payments will be. Add this to your other expenses and compare it to your expected profits to determine if a loan that large is right for you.

Be careful not to cut yourself too short, though, because you’ll want enough to meet your business needs.

3) Prepare Your Credit Score

The next step in getting a business loan is to prepare your credit scores. You have a personal and business credit score.

If starting a new business, lenders will look to your personal credit score for eligibility. If you’ve been in business for over a year, you’ll want to make sure your business credit score is decent.

If your credit scores are low, be sure to try and raise them before applying for a loan. Better credit scores result in bigger loans with lower interest rates.

4) Figure Out What Your Assets Are Worth

When determining your eligibility for loans, lenders will sometimes look at the value of your assets. This helps assure them that you’ll be able to pay them back in the future.

As a result, it’s a good idea to evaluate what assets you have and what they’re worth. Generally, you’ll consider business assets like equipment and real estate, but startup entrepreneurs will need to evaluate their personal assets. This includes fine jewellery and vehicles.

Be sure you only include the assets you’re willing to risk in exchange for the loan.

5) Acquire the Documents You’ll Need

Your application for a business loan will ask for a lot of financial and legal documents. It makes the application process easier on you if you prepare to have these documents ready in advance.

You should get together your financial statements, cash flow documents, future financial projections, tax returns, business legal documents, and licenses.

It’s always a bonus if you can provide a detailed business plan as well.

Decide on a Type of Loan

Now that you know what you’ll be using the business loan for, it’s time to decide on the type of business loan you want.

When choosing, you’ll want to keep in mind your own eligibility. Different loans have different requirements regarding credit score, financial situation, and years in business.

Secured Loans

  • Takes a month or longer to receive
  • Get up to £100,000 or more
  • 5+ years to pay it off
  • Lower interest rates
  • Uses collateral as security
  • For well-established businesses

Unsecured Loans

  • Received faster than a secured loan
  • Get up to £500,000
  • Generally a 3-5 year payoff
  • Higher interest rates
  • Can pursue payment based on director’s guarantee
  • For businesses who don’t have collateral to offer

Short-term Business Loans

  • Received within a couple of days
  • Get up to £200,000
  • Often have higher interest rates
  • One month to one year to pay off
  • For nonprofits or businesses who don’t need a lot

Cash Advance Loans

  • Money received based on sales
  • Works like credit
  • Interest rates and fees depend on borrowing amount

Government-sponsored Startup Loans

  • Get up to £25,000
  • 1-5 years to pay it off
  • Fixed interest rates
  • 12 months of free mentoring
  • For new startup businesses only

Peer-to-Peer Business Loans

  • Get up to £35,000
  • Requires a good credit score
  • Comparable APR’s to regular loans
  • Comes from online investors instead of a bank

Equipment Financing Loans

  • Covers 80-100% of the equipment cost
  • Fixed payments for 1-7 years
  • Often times have lower interest rates
  • Uses equipment as collateral

Invoice Financing

  • Money amount based on your invoices
  • Receive it immediately
  • Small processing fee based on company turnover 

See All Your Offers

One of the best tips for how to apply for a business loan is to do some shopping around. You don’t have to go with the first offer you get.

Keeping your mind open to other options before committing can save you a lot of money down the road.

Evaluate your business loan options to find the one that works best for you and your budget. Consider factors like loan amount, term, monthly payments, interest rates, penalties, and annual percentage rate (APR).

APR is the total amount in interest that you’ll be paying over the course of a year. Sometimes this number is essential for putting interest rates in perspective.

Apply For the Loan You Want

Now you’re finally ready to apply.

Be sure to provide all of the documents they ask for. If you don’t have one, find out how to get it or what you can supplement it with. Always double-check that they received everything, regardless of whether you apply online, in-person, or through the mail.

It can take anywhere from a few days to a few months to find out if you got the loan depending on the loan type.

If you’re accepted, make sure you review and understand all of the loan’s terms before signing.


Funding Startups

Of all the business loans to apply for, getting a loan to start a business can be the hardest. This is because a new startup doesn’t have any proof of financial standing or credit.

While some options like government-backed startup loans are obtainable, there’s always the chance you’ll be denied.

If this happens, you’ll need other ways to fund your business for the first year until a business loan becomes a viable option.

Great options for startups include crowd-sourcing, personal investors, asking friends or family for help, and business credit cards. A business credit functions the same as a regular credit card and will also help you develop good business credit.

Get a Business Loan to Expand Your Business

Business loans have the power to greatly expand your business and open it to new opportunities.

Before applying, you’ll want to make sure that a business loan is the right choice for you. If it is, you can follow this guide to get the loan you deserve.

From bank loans to equipment loans and microloans to invoice financing, there’s financial help for you.

If you found this article helpful, visit our website regularly for all of your financial news and advice.


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