What is a small business loan?

Small business loans come in all sorts of sizes and get used for several reasons. They can enable small businesses to operate daily by smoothing cash flow. The loans can help fund expansion plans by helping manufacturing firms to invest in new equipment and machinery. Or businesses may choose to use the funding to take on more staff or engage in research before implementing a new project.

A small business loan can be secured or unsecured. This critical distinction gets decided by a range of factors. The size of the loan and the length of time you’ve been in business are two such considerations. The type of business you operate, the overall creditworthiness of the company (and directors) and how the lender assesses the risk attached to the loan will also be factors. Lenders may sometimes ask for personal guarantees depending on their lending criteria.

A small business loan starts from £1,000 and can range up to £20m with terms typically between three and six years. However, at Funding Options, we can assist you with whatever size loan is required for your business needs.

How can I get a small business loan for my business?

After you’ve put together a project plan and gathered all the evidence and documentation you’re likely to need, you’re ready to apply for funding.  

We have an extensive panel of over 120 lenders ready and willing to consider your application. Our team of dedicated Business Finance Specialists are on hand to help you throughout your entire funding journey. Here’s how the five-stage process typically works.

Step 1: Initial application

When you apply for business finance, you’ll be asked how much you want to borrow, what you’re going to use it for, and how long you need it.

This determines which products you’re eligible for and whether your loan request is likely to be accepted. We highlight the products that make sense for your business, such as invoice finance for firms that trade on credit or asset finance if you want to purchase plant and machinery. 

Funding Options can generally advise if your proposition is viable within minutes; there’s no need to wait weeks for an application to be processed. 

Step 2: Approaching the lenders

There’s a shortlist of products to explore if we can move past stage 1. The Business Finance Specialist will ask for copies of standard documents like bank statements and filed accounts. They might need details of your current debtors for invoice finance or the plant and machinery components for asset finance.

The financial documents are assessed for your business needs and purpose of funds against the eligibility criteria. Funding Options will approach the lenders we determine the most suitable if you want to proceed. Approvals are free, and you’re under no obligation to take out the loan if you change your mind. 

Step 3: Underwriting

Lenders perform due diligence checks, looking at credit history, bank statements, and other details to ensure your application is viable in practice as well as in principle.

Depending on the lender and the application’s complexity, this can take a few hours and a few days. Forty-eight hours is a reasonable turnaround from application to decision for most situations. 

Step 4: Offer and acceptance

If the proposal moves through stage 3, you need to check the terms of any offers you’ve received. You can then decide which offer you’d like to proceed with. 

With an agreement in place, you can decide to proceed with the process. If you get approval from more than one lender, you can select the most suitable offer. 

Step 5: Funds are released 

Once you’ve accepted the offer, you’ll typically have the money in your account within a day or two, and this element is called drawdown. You’ve drawn down the cash from the lender to your bank account. 

What are lenders looking for on your application?

Lenders want to lend, and it’s how, for instance, many banks make part of their profits. They’re in the risk business, but they need to limit that risk by ensuring they follow guidelines to arrive at decisions. You can help the smooth process of decision making by being prepared.

So, you can help by having your latest management accounts ready, getting your pitch up to speed, proving the need for the loan and that you can afford it.

What is the difference between secured and unsecured loans?

The secured loan will require assets as security; a charging order gets attached against unsecured assets in your business. For example, you may own equipment or premises free of any bank charges that a lender can take as security. 

Lenders might ask for this type of collateral if they think the business hasn’t reached the stage where its history and performance indicate there’s little chance of default.

The length of time you’ve been in business, the profitability, and the balance sheet illustrating the business assets are the type of elements that get considered when the lender decides on the need for security.

Unsecured lending is the opposite of secured; the loan gets agreed upon without any required business collateral. You also don’t have to agree to any second charge on your home. A personal guarantee may be necessary, but this comes with no security conditions.

What rates of interest will I pay?

The rates of interest you pay for your SME loan will vary depending on many factors, such as

• The type of business

• The business’s credibility and financial history

• What the loan is for

• How big the loan is

• The repayments length of time

Some businesses are considered riskier than others; therefore, the lending rate might alter. The length of time you’ve been in business and its documented performance will also determine the rate you get offered if you’re approved.

How you intend to use the loan can also affect the interest rate. If you apply for vehicle leasing finance, you can expect to pay a higher interest rate compared to a commercial mortgage loan on your premises.

The size of the loan and the repayment term will also dictate the interest rate. As a rule of thumb, large loans come with lower interest rates, particularly if they’re commercial mortgages. Loans taken out over shorter periods tend to have higher interest rates, but you might pay back less capital and interest over a shorter term.

What are the benefits of a small business loan?

There are many benefits of a small business loan, and you can use a cash injection for several purposes. Maybe you want to consolidate your current business and its performance. Perhaps you’re looking to expand, buy new equipment or vehicles to push your venture forward. Maybe you’re looking to ease temporary and seasonal cash flow issues or develop a new project and strand to your business operations.

Other benefits of a small business loan can include building a credible credit history; once lenders know your business honours repayments on time, they’re more likely to lend.

How to use a small business loan

You can use your loan for the specific purpose you received it. However, if it’s a more general loan to alleviate temporary issues, you may decide to employ the money for other purposes once the short-term issue is resolved.

Lenders might attach strict criteria to the loan, such as how it gets spent, and they might ask for proof that the loan gets used for the purpose agreed. Some lenders will insist on other restrictions, such as not using it to pay off or consolidate other loans.

What types of loans are available for my small business?

There are many different options you can select. Asset finance, green finance, Merchant Cash Advances (MCAs), revolving credit facilities (RCFs), equipment leasing and car finance are just some of the funding options available to you. 

What loan is right for my business?

There is no one-size-fits-all solution for business loans, and each is as unique as your business. That’s why using a business finance marketplace such as Funding Options is a great idea to help you discover the most appropriate option for your business needs.

Setting up a discussion with one of our Business Finance Specialists can help once you’ve considered an essential checklist. Some things to consider before applying for a loan are: 

1. How much money do I want to borrow, and what can I/we afford to pay back?

2. How long is the money needed, is short or long-term best?

3. Do I have any other outstanding business debts?

4. How long has my business been running?

5. Is my business in robust financial health?

6. What assets am I willing to offer for a secured loan if necessary?

7. If things don’t go according to plan, can I avoid defaulting on repayments?

How to prepare your latest management accounts

There isn’t necessarily a cut off loan size whereby a lender won’t ask for up to date accounting information because the loan is small. Still, it would be best to assume that whatever the loan size you are after, you should have detailed accounting and management information ready at your fingertips to share if requested by the lender.

It is essential to have your last yearly accounts ready and up to date management reports as of the most recent month. It would also be best to have the latest bank statements prepared and ready to share. 

If you’re a recent start-up who’s yet to file accounts with Companies House or tax returns with HMRC, then your latest management reports are even more essential, and the original business plan used to launch your business might prove helpful too.

Why choose Funding Options for a small business loan?

At Funding Options, we’re dismantling business funding barriers by providing business owners like you with quick and easy access to finance. Our Funding Cloud technology validates your business profile and matches you with the funding industry’s largest lender network.

What’s more, our dedicated Business Finance Experts are on hand to help you through the whole process, from application to money in the bank. So, don’t delay; kickstart those growth plans with business funding today!

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