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How to Apply for a Business Loan - 9 Steps
At Clifton Private Finance, we work diligently every day to help our clients secure the funding they need to grow their business.
One area in particular where even the best business leaders can stumble is with the process of a loan application.
In this guide, we take you through the 9 steps to applying for a business loan so that you can be better prepared and maximise your chance of success.
And for a fast-track service to checking your eligibility today, see below:
Contents
Step 1 - Defining the Need
Step 2 - Determining Risk and Affordability
Step 3 - Managing Your Credit Score
Step 4 - Revising The Business Plan
Step 5 - Consider a Project Plan
Step 6 - Evaluate Existing Assets
Step 7 - Get All Paperwork in Order
Step 8 - Research the Loans
Step 9 - Make the Application
Business Loan Case Studies
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Step 1 - Defining the Need
The first step in your business loan application is clearly understanding the reasons for the loan.
Too many businesses make the mistake of stretching themselves with a loan simply because they can, and once the capital is in the bank, they don’t really know what to do with it.
Money that isn’t properly allocated is easily wasted, and many businesses squander their loans, spending the money inefficiently.
There are many potential reasons for a business loan:
Loans for Growth
For many, a business loan is an opportunity for growth. This includes most startup loans, where the company is going from zero to something - a definite pattern of growth.
Loans for growth are a very legitimate reason for a business loan, opening up opportunities today that will help your business develop.
The capital raised from these loans is typically used for one or more of the following:
- Investing in equipment
- Purchasing stock
- Branding
- Marketing
- Promotion
- Research and development
Cashflow Loans
A cashflow loan is one that is designed to smooth the ongoing running of the business. These often take the form of lines of credit, such as credit cards.
Cashflow loans help with:
- Seasonal downturns
- Bridging the gap while waiting for incoming payments - such as invoice finance
- Taking advantage of unexpected opportunities
- Covering unforeseen expenses
Tax Loans
Tax loans are a subset of loans designed to spread the cost of payments to HMRC over the year.
These are usually short-term business loans, of one year or less, that allow your business to meet its legal financial obligations without heavily impacting existing capital.
See VAT Loans and Corporation Tax Loans
Debt Consolidation Loans
A business debt consolidation loan is one that is obtained to refinance existing debt, for example credit cards, overdrafts, or other loans on poor terms.
With a debt consolidation loan, a business can cut interest payments down and lower monthly debt service to improve cashflow.
Commercial Mortgages
A commercial mortgage allows your business to purchase its own property or land. This may be office space, warehouses, residential property to rent out, farming land, factories, development space, and more.
Bridging Finance
A business bridging loan is a short-term way to obtain significant capital to take advantage of an opportunity that will rapidly develop the business.
Bridging loans are developed with exit strategies to clear the loan as quickly as possible.
These exit strategies are often refinance options (such as a replacement loan or mortgage) that are more suitable in the long term but have an extended application process, making them too slow to take advantage of the unexpected opportunity.
Business bridging loans are often used for:
- Acquiring property at auction
- Purchasing stock or assets from companies forced into liquidation
- Funding new projects at short notice
Step 2 - Determining Risk and Affordability
When you apply to take out a loan, any potential lender is going to make an assessment based on your business’s perceived risk, and whether the finances are in place to make repayments on the loan affordable without placing too high a stress on cashflow.
Many business owners leap to a loan as an answer to any problem, and in doing so create more problems that can lead to their downfall and the business’s ultimate end.
Assessing loan risk at this stage is not about your risk as a borrower (lenders will undertake this later), but the risk of the loan to your business. What does happen if you cannot pay it back easily? What will you do if you cannot raise quite enough to fully cover your plans? What if something unexpected happens - do you have enough funds from elsewhere to weather a financial storm?
And then, can you truly afford the loan? If the monthly repayments are £2,000, for example, is the business bringing in a spare couple of thousand a month to cover them? What strain is it going to put on your day-to-day logistics?
Step 3 - Managing Your Credit Score
Your business credit rating is a metric that will be looked at in some depth when you make a loan application, so it is essential that you are fully aware of its status and do what you can to improve it.
Your company credit score (also known as your credit rating or credit history) is a value that is calculated based on your business activity regarding any existing financial obligations.
Trying to get a loan when you have bad credit is possible, but the process is harder and the interest rate on your loan will be higher, making the loan more costly in the long run. Managing your credit score to ensure it is in good order is of significant benefit.
Some key factors to build your business credit rating include:
- Making sure all your business registrations, including registered office address and directors’ details, are all in order.
- Paying all bills on time.
- Managing your credit card limits - try to use less than 30% of available credit.
- Clearing any overdrafts in full.
- Being patient. A key skill in managing a credit score is understanding that with time, all things pass, even poor credit decisions. Milestones such as three months, six months, and a year are important and it can be worth waiting until your financial difficulties and mistakes are in the past before making loan applications.
It is also important for new businesses to understand that a shining new ‘clean’ credit rating is not a good thing to have.
No history is almost as much risk as a poor history. For this reason, we always recommend that companies do what they can to build up a positive credit score.
Obtain company credit cards and manage them effectively, make sure building utilities are properly registered to the business for payment, and consider taking small and easy contracts, such as mobile phones, to build the business credit history.
For many businesses, especially startups or those that are sole traders or partnerships, your personal credit rating will also be a factor - in the case of sole traders, there is no separation between your business and personal credit rating.
Making sure your personal finances are in good order is often as important as the business credit history. For a limited company with multiple directors, all of their personal credit scores may be considered.
Step 4 - Revising The Business Plan
Most business owners have a business plan, created in the very early days of the business. Perhaps it was there to get startup funding, or maybe it was just developed to put the idea down on paper.
If you are looking for business financing, many lenders will want to see your business plan as another stage in their risk assessment. It is this that presents your ideas and their viability to someone who has no idea of your business and it is vital to helping them see your vision.
Part of your comprehensive business plan will also be your financial forecasting, essential for showing any prospective lender your ability to make repayments in the months and years to come.
Remember, that presentation is key, and take the time to make your business plan as professional as possible.
It is worth investing in specialist help to polish this document so that you put yourself and your business ideas forward to lenders as impressively as possible.
Step 5 - Consider a Project Plan
If the focus of your loan is a specific project, then in addition to the main business plan, it is worth developing a separate project plan.
Think of the project plan as a second business plan that concentrates purely on the project at hand with its own financial forecast and viability reasoning.
Step 6 - Evaluate Existing Assets
It may be that you will want to leverage existing assets to improve your loan application. This may be in terms of applying for a secured (or asset-based) loan through use of assets as collateral, or it may be that you have existing capital to present as a deposit when purchasing a new asset, lowering their risk.
It is important to ensure that the asset is able to be used in this way and that no senior debt financing is already tied to it. You will need to present all relevant evidence of the asset and your ownership as part of the application.
See asset finance for more information.
Step 7 - Get All Paperwork in Order
Loan applications need to be supported with a range of documentation to validate who you are and that your figures are accurate. You should have:
- Personal identity documentation
- Business registration information
- Business bank statements
- Most recent filed accounts
- Profit and loss figures
- Business plan
- A specific project plan, if relevant
- Asset documentation, if relevant
It is worth collecting digital copies of these documents all together so that they can be easily presented along with your loan application.
Step 8 - Research the Loans
With everything prepared, it is time to do your research to find the most suitable loan for your business need.
With a range of capital providers available, including diverse funding partners such as challenger banks or peer-to-peer lenders, the solutions available for businesses looking for a loan are wide.
Researching and determining the right loan can be extremely time consuming - working with a specialist can help. An independent finance broker, such as Clifton Private Finance, can open the doors to the full marketplace of options, provide support and advice, and discuss the terms and conditions of any loan to make sure you fully understand how it may affect your business for the future.
Experts have comprehensive knowledge of the range of products on the market and will offer a perspective to your funding need that may empower you to choose a loan that is better structured and on more suitable terms than more obvious alternatives.
An independent financial advisor will provide an unbiased opinion. With no ties to any specific bank or lender, we have no conflicts of interest and will work with you to scour the entire funding landscape to select the most beneficial choice.
Step 9 - Make the Application
The final step, of course, is to make the application. With everything in order, this stage will be simple and rapid, and have the maximum chance of success.
Making a formal application for a loan will have an impact on your business credit history.
Of course, if you are successful, this is of little consequence, but if your application is rejected then it can be damaging in the short term, making immediate secondary applications harder.
Processing multiple formal loan applications in a short time will make you seem desperate and higher risk.
For this reason, we recommend avoiding multiple speculative loan applications, instead ensuring the preparatory work has been done to give you the best possible chance on the first application.
It may be that you need to put back your plans for a few months if you acquire too many unsuccessful loan applications.
It is worth speaking to your financial broker if you find yourself in this unwanted loop so that they can find a product that fully takes your circumstances into account.
Business Loan Case Studies
Read some of our latest business loan case studies below to see how we've helped recent clients attain efficient financing for growth and cash flow.
Apply Now
As an independent financial advisor with teams of specialists dedicated to each branch of business funding, Clifton Private Finance represent your best chance of a successful business loan application.
Contact us today to speak to an advisor.
To see what we can do for you, call us on 0203 900 4322 or book a free consultation below.
