How to qualify for a business loan
Whether you want to launch a startup, grow your business or buy a company that already exists, a business loan can provide the cash injection you need. But can you get a business loan? Here’s what you need to know.
Business loan eligibility depends on a range of factors, including your personal credit history, the financial performance of the business, and the amount of debt the business already has. Read on to find out whether you and your business can get a business loan and what you can do to improve your chances of qualifying for one.
These unsecured and secured loans could help you grow your business, cover running costs or even fund a new company.
What do banks look at when you apply for a business loan?
Business loan criteria vary depending on the lender you choose and the type of loan you want to take out.
But there is some common ground. Whatever type of business loan you want, you must:
Be at least 18 years of age
Demonstrate you can comfortably repay the loan
Have a business – or plans to start one
Pass credit checks (just personal if you’re applying for a startup loan or personal and business if your company is up and running)
Most lenders also want to see a detailed business plan – or project plan if the loan is for a specific business project – that shows the money will be put to good use.
They may also ask to see other paperwork, such as your personal and/or business bank account statements and your tax returns.
How to get a business loan
There are a range of different types of business loans available, from startup business loans to secured business loans where you put up an asset, such as a property, as collateral to secure the loan.
So, your first job is to decide what type of business loan is right for your needs.
This depends on various factors, such as the amount you want to borrow, whether you’re setting up a new company or developing an existing business and how long you want to pay the loan back.
If you’re unsure, you can learn more with our series of handy business loan guides, including Unsecured business loans explained and how do business loans work.
As you can use personal loans for business purposes in some circumstances, it’s also worth checking out our guide on the pros and cons of using a personal versus a business loan.
Once you’ve made your choice, you can use our business loans comparison service to find business loans from a wide range of banks and specialist lenders.
It’s important to check the terms and conditions of each offer to make sure you and your business are eligible before applying.
Government-backed Start Up Loans, for example, are personal loans designed to help cover the initial costs of starting and developing a business. As such, they are not for activities such as debt repayment or training and education programmes.
The aim is to find the most suitable loan you’re likely to qualify for with the lowest overall cost.
Read more:
What do I need for a business loan?
Once you’re ready to apply for a business loan, it’s wise to have paperwork ready to go. You will need:
For you:
Full name and contact details, including proof of ID
Personal bank account details
For the business:
Name and contact details, including your company’s registration number
Start date, whether that’s in the past or future
Industry sector and annual revenue
You also need to tell the lender how much you want to borrow and why.
Additionally, you must have a business plan demonstrating how the money from the loan will benefit your business and enable you to meet the loan repayments over the term of the deal.
You can find more practical details about this in our guide on how to write a business plan for a loan application.
Top reasons why lenders reject business loan applications
The aim of the business loan application process is to ensure that individuals and businesses can meet the loan repayments throughout the loan term. This means you won’t get a business loan if your financial situation doesn’t support your application.
That’s why it’s worth taking the time to check your personal and business credit reports before applying to avoid having your business loan application rejected unnecessarily.
Checking your credit reports also helps you to choose the type of business loan that’s best for you. If, for example, your financial situation is borderline, it’s often wise to opt for a secured business loan where you put up assets as a security.
Here are four more common reasons that lenders reject business loan applications:
1. The applicant doesn’t match the loan’s terms and conditions
Most business types are eligible for a business loan, but certain lenders refuse to lend to companies in sectors such as:
Banking and money transfer services
Property investment
Gambling
Weapons manufacture
Some business loans are also aimed specifically at companies that operate in certain areas, such as research and development, or at businesses looking to invest in a specific area, such as mechanical equipment.
2. The information supplied isn’t accurate
It might be tempting to massage the figures to make your business loan application more attractive to lenders, but you’re unlikely to get away with it. And even if you do, you might well end up with financial difficulties as a result.
Meanwhile, if you are caught providing false information, the lender may blacklist you – making it much harder to get a loan of any kind in the future.
3. The application isn’t supported by a comprehensive business plan
Most business loan providers want to see a detailed business plan that demonstrates that the company they are lending to is well placed to repay the loan in full.
Depending on the type of loan you choose, this business plan may need to cover anything from 12 months to five years.
It should also cover potential pitfalls and feature a cash flow forecast predicting sufficient revenues to cover the loan repayments.
4. The paperwork is late
When you apply for a business loan, your aim is to convince the lender you’re capable of making the loan repayments on time every time.
So, failing to provide any documents requested within the set timeframe doesn’t look good.
That’s why it’s sensible to start preparing your paperwork before beginning your business loan application.
FAQs
How hard is it to get a business loan in the UK?
UK banks and lenders conduct credit checks on all business loan applicants. If you’re applying for a startup loan, they use personal credit checks.
On the other hand, if you’re applying for a loan for a business you already run or are hoping to buy, the lender checks the business’s credit history and score as well as your own. If either score is low, getting a business loan can be tricky.
The same is true if the business in question is not making a profit. Lenders generally want to see a net income of at least 1.25 times your operating expenses.
Anything below that makes it harder to borrow via a business loan, unless you can come to a special arrangement, such as finding someone to give a personal guarantee for the loan.
Financial considerations aside, applying for a business loan in the UK also means preparing a range of documents, including a business plan showing the lender your cash flow predictions for the future.
Can a self-employed person get a business loan?
Yes, you can take out a business loan as a self-employed person. In fact, many business loan applicants are self-employed people running their own businesses.
As with any loan application, the lender checks your credit history and financial situation before making a decision. For a business loan, it also checks your business accounts.
Can a new business qualify for a loan?
Yes, you can get a government-backed Start Up Loan during the first three years a company is in business, as long as you meet the other loan criteria.
Learn more about the options available with our guide explaining startup loans.
About Jessica Bown
Jessica Bown is an award-winning freelance journalist and editor who has been writing about personal finance for almost 20 years.