How to apply for a business loan

What is a business loan and how does it work?

What is a secured business loan?

What is an unsecured business loan?

Understand your business finances

What documents will you need to apply for a business loan?

• Bank statements and tax returns
• Business and personal tax returns
• Proof of business registration
• Business licences and permits
• Financial business statements
• Proof of collateral
• Business plan

Personal information required for your business loan

What is a business loan and how does it work?

A business loan is a set amount of money that you borrow for your business from a lender with the agreement to pay back with interest and within a set time frame. There are various business loans you can apply for depending on your financial needs, that can be either secured or unsecured and can range from short-term to long term.

What is a secured business loan?

Applying for a secured loan means using company assets as collateral if you fail to make payments on time or in full when agreed. Secured loans give your providers permission to request company assets to cover the cost of the missed payment and compensation.

Secured loans are helpful when you ask to borrow large amounts of money as they generally have lower interest rates than unsecured loans. However, defaulting on a secured loan can not only negatively impact your credit score, but you are also at risk of losing your assets.

What is an unsecured business loan?

Unsecured business loans allow you to borrow money without the need to offer property or collateral to secure the loan. Defaulting a payment on an unsecured business loan could result in late payment fees and increased interest rates. Consequently, if no payment is made and the loan cannot be settled out of court, the lender may be inclined to sue. Therefore, it is essential to ensure you understand your finances and your business needs before applying for a business loan to make sure you can afford the repayments.

Understand your business finances

When selecting the best business loan, it is important to have in mind the amount you would like to borrow, including interest, the time it will take you to repay the lender, and whether you plan to repay the loan as a lump sum or through monthly instalments. Keep in mind your business’s finances and have a realistic view of what it can afford in terms of repayments. It’s also worth doing some research, checking eligibility requirements and comparing business loans on the market to ensure you are getting a good deal.

What documents will you need to apply for a business loan?

To verify your business loan application most lenders will require a number of documents, which you will need to have ready to submit.

Bank statements and tax returns

The bank statements you submit are essential to your application and must include your official business name. Depending on the lender you will need to provide at least three months’ worth of business bank statements, which will allow the lenders to look at your spending and income. It is worth also having your personal bank statements available as some lenders can ask for that too.

Business tax returns

You will need to provide your business tax return to your chosen lender to verify your income. Business lenders can determine your eligibility from your tax returns, looking at if you can afford the loan repayments.

Proof of business registration

The business loan lender will need to know how your business is structured. If you have a small business, there are four common types of business structures:

• Sole proprietorship
• Partnership
• Corporation
• Limited liability

Business licence and permits

Business licences and permits offer proof of business ownership, reassuring the lender that you are the correct person to make financial decisions within the business.

Financial business statements

Your business loan application will also require a profit and loss statement, a balance sheet and a cash flow statement, which all provide valuable insight into your business’s financial performance over the years.

Proof of collateral

If you plan on taking out a secured loan, you will need to prove that you have enough valuable collateral to cover the loan amount, whether that be property or other business assets. It’s important to note the risks of taking out a secured loan could result in these assets being repossessed if too many loan repayments have defaulted.

Business plan

Not all lenders will require a business plan, however it’s always best to have one prepared. A business plan can be important to the lender as they need to see that your business is viable and worth investing in. You should take the time to prepare a detailed and well thought-out plan.

Personal information required for your business loan

There are also some personal requirements when applying for a business loan; for example, you must be eighteen or over to apply, so you must provide identification to prove this. You must also be a UK resident and you must have a UK bank account.

Even if you match the criteria and submit everything required in your application, you may still be rejected. This can happen because of your business’ credit score, although you can improve it by repaying loans and debts in full and on time. Your business may also not have been trading for long enough to be considered by the lender. Or, the business may already be in debt, which could deter future lenders due to being a higher risk borrower. Alternatively, your lender may simply not invest in the specific sector or industry your business falls into.

The interest the lender will make from your business loan is major revenue for them, so it is in their best interest that your application is successful. However, lenders have to consider the risks and benefits of providing your business with credit, so your application may not always be successful.

Applying for the first loan you find when you need money for your business can be tempting. However, you should take time to research and make comparisons to ensure you find the best business loan for your needs. Once you've selected some possible lenders, have a look at our guide to five things to check when making loan comparisons to help you make an informed decision about which loan is best for your business's needs.