A small business loan is additional finance that is lent to small to medium businesses that they can use to achieve goals, realise projects and manage cash-flow. Most loans are either unsecured or secured, although within these two categories there are many different variations and types.
What is the best small business loan for me?
This depends entirely on the type of organisation you are, your financial position and the finance goal. Unsecured loans are typically suitable for businesses that have already provided their personal collateral and want to top up an existing financial structure. They are often issued by lenders who offer swift online processes, as there is no need to assess collateral. Unsecured loans are generally a good option for businesses with short-term finance goals. Secured loans are more suitable for businesses that are still able to provide the lender with collateral. As the risk for the lender decreases with secured loans, interest rates are typically lower. As the collateral will need to be assessed, process duration tends to be longer. Secured loans are generally a more long-term solution.
Unsecured business loans are ideal for many small businesses as they do not require personal collateral. These loans are based solely on the financial strength of the business, requiring solid risk analysis and underwriting processes. Many modern fintech lenders use technology as an enabler for that, creating time to focus on high quality service. The advantage of an unsecured loan is that business owners don’t risk losing personal collateral, which in many cases is already given away for bank loans. Unsecured loans are therefore an ideal way to top up an existing loan for which personal collateral has already been provided.
Secured business loans are based on the business’ assets such as property and equipment, or the business’ cash flow. This structure has a protective purpose for the lender, as it secures a certain type of income from the borrower, should the borrower not be able to pay back the loan. Personal or corporate guarantees are also a common way of securing a loan, in which the borrower is fully or partly responsible for backing the loan in whatever way possible. Application processes for secured loans tend to be longer, as assets need to be evaluated, and they tend to have more stringent requirements.
The difficulty of getting a small business loan depends on the lender and type of loan. For example, the application process of many new online lenders will be faster and straight-forward compared to a traditional high-street bank which will require physical appointments and documentation. Outside of the application process, getting the loan will depend on the business’s ability to prove a stable financial situation and healthy cash flow. The more established, well managed and profitable businesses who have their financial documentation ready and at hand benefit from that in terms of process time and likelihood to be approved. However, lenders will always look at a plethora of different financial factors, therefore it would be impossible to determine in advance if a specific small business loan will be hard to get.
How do you qualify for a small business loan?
Each lender will have its own criteria for business loans, but there are a few general standards that most lenders will require.
1.Prove you are profitable and growing
You will need to provide the lender with bank statements from a set period of time which must show that the company is doing well and moving in the right direction. Most lenders will need bank statements, annual accounts, VAT returns and/or an aged debtor listing.
2.Keep well-managed bank accounts
Your bank accounts will need to be clear and properly managed. This involves keeping accurate records of all income and costs, which allows for much clearer financial projections. Having a good bookkeeper or accounting software can make this process much easier.
3.Have minimal short term debt
Considerable amounts of short term debt, including overdue tax payments, will be a red flag for the lender, who will be reluctant to take on additional risks by lending to a company already in debt, as this would be over-crediting a business that cannot carry any additional debt. You should be cautious of lenders who are willing to finance businesses in debt.
4.Build a good credit history (company and directory)
The lender will want to check that both the small business and its director have a good credit history. This can be built by keeping credit balances low and always paying your bills on time.
Are small business loans a good idea?
Small business loans can be an effective way of expanding and improving your business if they are used sensibly and responsibly. If your business is profitable, well managed and established a loan can provide essential funding for buying stock, equipment and managing cash-flow. In this case small business loans can be an essential part of growing a business to its next level. However, if a business is unstable or in financial trouble, attracting additional debt is usually not a responsible strategy.
Want to know more?
Speak to our client service team on 0203 308 9188 or have a look at our brochure.