Business Loans – Top Tips Before Applying! Criteria & FAQ’s

Business loans are now super simple to apply for! Gone are the days when you have to go into a bank for a meeting with the bank manager, taking along your business plan and accounts (whether you have been trading for decades or a start-up) in your suit and tie and plead your case. 

Business loans can now be applied for online and you’ll get a decision back usually instantly and the money is in your account within 24 hours. Sometimes even within just a few hours.

What can be more difficult is finding a good interest rate, finding a business loan to suit your repayment requirements, the list goes on. Then there is all the jargon, unsecured business loans, secured business loans and who is liable for what and when.

This guide was set up to make it easy, so you know what business loan to choose and why it’s the best one for you.

What is a business loan?

Well this one is easy to answer, a business loan is a loan specifically for business or commercial activity. They are typically taken out by businesses who require some extra working capital or who wish to purchase a new piece of equipment to name just two uses of a business loan. It might even be to buy more stock so you can expand. Not forgetting of course, business loans to buy other businesses!

Whatever it is you require a business loan for rest assured the right one is out there waiting for you and your business.

Business Loan FAQ’s

Firstly whilst laying out these points I wish to stress there are no ‘hard and fast’ rules, but here are some basics to have in the back of your mind before you apply for the loan.

  • You have a UK based business – well applying for a business loan from a UK lender you’d expect nothing less. No this doesn’t mean you can’t apply if you sell goods or services overseas, far from it. All that means is that your business is based in the UK…
  • The business loan you’re looking to apply for is less than 25% of your annual turnover. Why is this a point? Well lenders can’t swamp you with debt as the repayments could place your business into difficulty and instead of the business loan helping, it could hinder.
  • Your business is profitable – runs on from the point before, if you aren’t making a profit, how do you intend to repay the loan? Lenders will need to be sure you have the means to make the repayments.
  • Have you been trading for more than 2 years (24 months)? For a lot of loans, but not all, this 2 year rule applies. This is only so you can show your business has some track record.
  • Late payments or CCJs – having other poorly managed lines of credit or county court judgments (CCJs) might affect the decision or rate of interest in which you can obtain a business loan.

Nowadays lots of lenders are very flexible and will provide loans for your business even if you have poor credit rating.

Before we go on let’s just get through some more questions, the sort of questions everyone wants to know but may not want to ask directly to the business loan provider…(we have got you covered!)

The Business Loan ‘Nitty Gritty’

Will a business loan affect a mortgage?

An existing mortgage shouldn’t be affected. However it may affect the business loan amount you could be eligible for. Why? 

Simply because its ‘other borrowings’ that the lender may take into account when assessing repayments of the business loan. A residential mortgage on, say a property you live in, is different from a commercial mortgage you have for a building you work in or operate from. The commercial mortgage could be obtained through the business and residential mortgage for say your home is usually done personally through your wages or salary.

Unsecured vs Secured Business Loans

This tends to be the most frequently asked question and the answer is simple. A secured business loan is one which has some kind of asset, to ‘back up’ the loan. In plain English you have something the lender can take if you can’t repay the business loan. Typically something like a property or a vehicle.

An unsecured loan is therefore the opposite, it has nothing in the way of an asset to secure the loan against. As the lender has no security these loans tend to have a higher interest rate than a secured loan.

Will a business loan affect my personal credit?

Now the thing to bear in mind is if you wish to obtain a mortgage after taking out a business loan. Lenders, as we have said before, will take current borrowings into consideration when assessing your credibility for any loan. However a business loan is tied to the business and a mortgage for a house [to live in[ is based upon your personal earnings not necessarily the businesses.

So this is usually when people start thinking, shall I take out a personal loan instead of a business loan, and just put that money into the business…?

Business Loan ‘vs’ Personal Loans

Depends entirely on circumstance. It’s normally said that a personal loan is easier to get than a business loan. The difference is this – normally a business loan is paid back from the business whereas a personal loan is paid back via an individual. The grey area is then if you are a sole trader as you sort of ‘are’ the business…

The question is which is cheaper, a Business Loan or a Personal Loan?

Are business loans tax deductible?

Most interest payments on business loans are tax deductible.

Business Loan Recap

So in short, business loans come down to how much you can afford. It’s usually that simple. If your credit rating is good – Great News – you’ll typically get a better interest rate! 

How to get a business loan?

The best way is to run through the points above to give yourself the best chance of obtaining one, then simply apply. You won’t know till you give it a go.

How to apply for a business loan?

The process is straightforward enough, after you apply the lender will do their necessary work and give you an answer often straight away, but don’t be surprised if it can take upto 24 hours for a result.

A Final Tip

Remember that if you’re eligible for a business loan, it really comes to what you can afford to repay each month. So bear in mind that it is more expensive to take a loan out over a longer period of time (as you’ll typically pay more interest). But a business loan spread over a longer period means the monthly repayments can be less and therefore you could increase your chance of getting a business loan, as it down to affordability.

A Final Final Tip!

Financially stretching yourself each month won’t look good to the lender. So instead apply a DIY stress test to yourself. It’s usually what the lenders do anyway, so get yourself ahead of them.

So how it works is to imagine you have a reduction in income by 5-20% due to unforeseen circumstances. Think Covid-19. If you still afford the monthly business loan repayments with this reduction in income, you’ve stress tested yourself and now stand in very good stead for being accepted for a business loan.