From time to time every business needs access to working capital; if you don’t have a lump sum in the bank account, a business loan can provide the answer. Suitable for covering a range of expenses from recruiting staff and buying stock to purchasing equipment and paying off debts, a business loan is a flexible solution.
However, a business loan is different to personal finance and there are different criteria that you may not be familiar with.
Is my business eligible for a loan?
Any type of business can apply for a business loan but not everyone will be approved. That’s why it’s a good idea to use a broker who can direct your application towards the lender/s who are most likely to accept you.
The crucial difference with a business loan is that it’s based on the credit-worthiness of your business, not on you as an individual. You could have the strongest personal credit rating possible and still get declined for a business loan.
Every lender will have their own individual criteria. For example, some will only consider limited companies or those who are VAT-registered. If you’re a smaller sole trader who’s below the threshold for VAT, this may mean you have less choice on the market. Nevertheless, there are lenders who don’t insist on these things and are more sympathetic to the smaller business. The crucial thing is knowing the criteria that the lender applies and whether you fulfil them in the most basic terms.
If your business is new you may also find it more challenging to get a loan. This is because most lenders want to see a minimum of two years of trading accounts. Therefore, if you were hoping to get a business loan to start a new venture, you might not get the answer you want. However, there are products specifically designed for start-ups that may be more suitable.
How will my business be assessed for a loan?
As mentioned above, it’s the credit score of your business which is crucial to whether you are approved for a business loan. Looking at the last two years trading accounts will provide the lender with the figures, but when assessing your business creditworthiness they take many more factors into account.
Here’s a look at some of the most common, and how you can improve your score on each.
Make payments on time
The same principles as for personal borrowing apply here. Make sure you don’t default on any credit and make each payment on time and you’ll boost your chances.
File accounts in a timely fashion
The most important thing is that your accounts are up to date but if you only get them in just before the deadline you’ll create the impression that your business is poorly organised and haphazard. While it may not be the most essential factor, it can contribute to the lender’s perception of your business.
Use an accountant to produce audited accounts
Audited accounts aren’t a legal requirement and it’s perfectly valid to produce your own accounts. However, if you have audited accounts you have the benefit of professional verification and this will be a big tick in your favour.
Have a clear business plan
The secret to commercial success is the ability to plan ahead and use every penny wisely. If you can show the lender that you have done your research and can show why the loan would be beneficial to your business, you’ll impress. Remember to include current and projected figures as well as cash-flow which is capable of covering the loan payments.
It’s never been more important to have a strong digital presence and lenders will use your online website and social media pages to see how you conduct yourself. This is part of due diligence by the lender and will assist them in assessing whether you carry out your business in a professional way.
Consider offering collateral
It’s possible to have an asset-based business loan, the commercial equivalent of a secured loan. This provides the lender with security, giving you a greater chance of acceptance.
Keep your own personal credit record in good shape
Although this is a business loan, the lender will feel far happier if the person at the helm is low-risk.
To get more information about business loans or to apply, contact Loans Warehouse on 01923 678 870 right away.