The basics of getting a business loan

The basics of getting a business loan are much the same as those for getting a personal loan.  There are, however, some important differences in how those principles are applied.  Here is a quick guide to what you need to know about applying for a business loan.

You need to be clear about why you want the loan

There are two reasons why you need to be clear about why you want the loan.  The first is because it’s important for you and the second is because it’s probably going to be important to any potential lender.

It’s important for you because all business decisions should be taken mindfully and that is particularly true of decisions with financial implication.  You not only need to think about why you need the loan but also what this says about your business and whether or not you might have any other options. 

For example, if you spot an exciting growth opportunity and need a loan to finance ramping up your business to take advantage of it, then a business loan may indeed be your only pragmatic option.  If, however, you’re facing shortfalls due to cash-flow issues then a business loan may or may not be your only practical option in the short term, but over the long term, you need to make it a priority to sort out your cash-flow issues. 

Somewhat ironically, doing so may increase your ability to get a business loan at a future date, since lenders like to see healthy cash-flows.  It reassures them that you can actually make repayments.

Get your financial house and paperwork in order

Be aware that businesses do have credit ratings.  Like business loans, they work slightly differently from consumer credit ratings but the basic idea is the same.  For the most part, the only way to build up a good credit rating is to act responsibly and wait for time to do its work.  As in the consumer world, however, it can pay to double-check your credit rating before you apply for credit, so you can deal with any mistakes.

Similarly, if there’s anything you can do to improve your general financial management, then you usually want to do it, if possible, before you apply for a business loan.  As a minimum, get all your financial paperwork together and organised so that you can be completely certain that you are entering the correct and up-to-date information.  This may seem like stating the obvious, but if you’re not organised then you can enter the wrong information, which can cause you to be declined for a business loan.

Only apply for suitable loans at a level you can demonstrably afford to repay

All loans will have their terms and conditions and, while it may seem brutally unfair, if you’re a small business or a young business (or both), then you may be excluded from quite a few of them.  For example, even so-called “start-up loans” may require you to have 12-months of trading history and hence won’t be any use to you until you have a year of trading under your belt. 

This makes it all the more important to ensure that you do not wind up getting turned down for a loan for which you are, in principle, eligible, by over-stretching yourself or at least giving the impression of doing so.  Remember that lenders have to answer to both regulators and shareholders and hence generally prefer to err on the side of caution when deciding how much you can afford.

It also has to be said that algorithm-focused application forms are not ideal for smaller and younger businesses as they tend to overlook intangible elements like the quality of the management, which can be vital for smaller and younger businesses.  Niche lenders, by contrast, often have a more human touch and will assess potential clients on a broader range of factors.

If you’d like to learn more about the business loans we offer, please get in touch now.