Financing your business can be done in many ways but a business loan could be one way of borrowing that doesn’t require the use of crowdfunding or expensive overdrafts. Business loans can enable business owners to borrow money without giving up equity stakes in their business.
These types of loans are designed for commercial organisations than individuals, which are paid back by the business owner every month. How much you pay back and how often is dependent on how much money you’re borrowing and the timescale involved.
What is a business loan?
A business loan is an agreement between the business and a lender. The situation involves the lender agreeing to give a certain amount of money to the business and the business owner has to pay them back.
The business owner could use a business loan to spend on extra equipment or the money borrowed could be used more for general use, which may include having extra working capital.
How does a business loan work?
Business loans are very similar to personal loans in how they work. For a business owner, a business loan works by making an application to the lender for a specific amount of money, usually a bank or building society. See our article on the difference between business loans and personal loans for further information.
A decision will then be made by the lender on whether they will offer you the loan for your business. If your application is successful, then you will not only receive the money, but you will also have to repay the loan over a set period of time.
What are the types of business loans available for business owners?
There are various types of business loans that are available for business owners, which can vary depending on the sector your business operates in. However, there are two main types of business loans; namely, unsecured and secured loans:
Unsecured business loan
An unsecured business loan can be taken out without using business assets as security. While this type of business loan can be used for various purposes, you will have to provide a personal guarantee when using an unsecured loan.
Secured business loan
Unlike an unsecured business loan, a secured business loan is where a business owner uses assets as security. They are useful when it comes to borrowing large amounts, but if you cannot repay the loan, the lender can take the assets to cover their loss. Common examples include business-owned property, vehicles or equipment. In some cases, personal assets like homes may be used, particularly for start-ups without established business assets.
What information do you need to make a business loan application?
When it comes to information for a business loan application, the owner needs to make sure that they have all the documents required for a lender to know how much you’re applying for and how the money will be used.
Before you apply for a business loan, the following documents will help you in putting together your application:
- Business Bank Statements
- Financial Statements
- Credit Score
- Business Tax Returns
- Legal Documents
- Proof of address and ID for company director(s)
Lenders are often more willing to approve loans for businesses that demonstrate financial foresight. This includes providing sales assumptions – projections of revenue based on market data and industry trends – and a cash flow forecast, which outlines expected income and expenditures. These documents show lenders your understanding of the market and your business’s potential to generate sufficient income for loan repayments. Having well-prepared forecasts can significantly boost your chances of approval.
Business loan eligibility and requirements
For business owners, there are set eligibility criteria and requirements when applying for a business loan. In 2024, there are more options available for finding funding sources compared with 10 or 20 years ago.
When applying for our business loans, your business must meet certain eligibility criteria. It should have been operating for at least three years and demonstrate a consistent track record of profitability. Additionally, some loans may require your business to meet specific conditions, such as achieving a minimum annual turnover.
Creditworthiness plays a significant role in the approval process for both personal and business loans. Established businesses may also undergo credit checks to assess their history of meeting financial obligations. Before applying, review your credit report for errors or areas of improvement. Strengthening your credit profile by repaying outstanding debts or lowering credit utilisation can positively influence your application.
Business requirements
The requirements for a business loan have a business component in the application. Here are some of the requirements for how to qualify for a business loan in the UK:
- How old your business is
- Your credit score
- Business’ annual revenue
- Personal debt-to-credit ratio
Personal requirements
Not only are there business requirements that need to be met with a business loan application, but there are also personal requirements that could affect the lender’s decision.
Here’s some of the personal requirements that are required for a business owner to make a UK-based business loan application:
- You have to be at least 18 years old
- Have a UK bank account
- Your business must be based in the UK
- You have to be a UK resident to make a business loan application
Common mistakes to avoid with business loan applications
When making a business loan application, it is important that you do not make any mistakes when filling out the form. This can harm your application and prevent you from getting the loan.
There are many common mistakes that business owners make when they apply for business finance via a loan, which may include the following:
- Not fulfilling business loan eligibility requirements
- Making big changes to your business
- Not being attentive to your credit score
- Failing to submit a thorough business plan
- Lying on your business loan application
Conclusion
Business loans can be useful for business owners when it comes to accessing additional funding for their business.
White Oak UK has business development loans that can be used by business owners to help them expand their workforce, as well as take on new challenges that the business is facing right now.
If you are looking for funding, then contact White Oak UK’s finance expert and we can see if your business is eligible for a business loan.
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