How to Apply for a Business Loan: A Complete Guide
Business loans can provide companies with additional capital for a wide range of purposes, from managing working capital and purchasing equipment to funding expansion, acquisitions and other strategic investments.
However, securing the right funding involves more than simply submitting an application. The amount required, purpose of the funding, financial position of the business and proposed repayment structure can all influence which lenders and products may be appropriate.
Understanding the process before approaching the market can help businesses prepare a stronger application and identify finance that is better aligned with their requirements.
What Can a Business Loan Be Used For?
Businesses seek external finance for many different reasons. Some requirements are short-term and operational, while others involve significant investment over several years.
Common uses include:
- Supporting working capital
- Managing short-term cash flow requirements
- Purchasing stock or materials
- Investing in equipment or machinery
- Funding recruitment
- Opening new premises
- Supporting expansion
- Refinancing existing borrowing
- Funding acquisitions
- Investing in new products, services or technology
The purpose of the funding is important because it can influence the type of finance that should be considered.
A business purchasing machinery, for example, may find that asset finance is more appropriate than a conventional business loan. A company experiencing timing differences between raising invoices and receiving payment may instead consider invoice finance or a revolving credit facility.
The starting point should therefore be understanding the requirement rather than choosing a particular product.
1. Establish How Much Funding You Need
Before approaching lenders, establish both how much capital is required and what the money will be used for.
The funding requirement should ideally be supported by a clear commercial rationale.
For example, a business seeking £250,000 to purchase additional equipment should be able to explain how the investment will affect production capacity, revenue or operational efficiency.
Likewise, a company seeking working capital should understand why additional liquidity is required and how the proposed facility fits into its wider cash flow position.
Borrowing significantly more than required can unnecessarily increase financing costs. Conversely, raising too little may leave the business requiring additional finance shortly afterwards.
A well-defined requirement makes it easier to assess the appropriate funding structure from the outset.
2. Understand Your Current Financial Position
Lenders will typically want to understand the financial strength and performance of the business before offering funding.
Depending on the lender, product and amount being requested, this may involve reviewing information such as:
- Filed or management accounts
- Business bank statements
- Current turnover
- Profitability
- Existing borrowing
- Outstanding financial commitments
- Cash flow
- Assets and liabilities
- Trading history
- Credit history
Larger or more complex transactions may require considerably more information.
Businesses seeking acquisition finance, significant property funding or larger corporate facilities, for example, may need to provide forecasts, management information, details of existing debt and supporting information relating specifically to the proposed transaction.
Having this information organised before approaching lenders can make the application process considerably more efficient.
3. Review Existing Borrowing
Existing borrowing can have an important influence on a new funding application.
Before applying, businesses should understand their current facilities, including outstanding balances, monthly repayments, security arrangements and remaining terms.
In some circumstances, adding another facility may be appropriate. In others, refinancing or restructuring existing borrowing alongside the new requirement may produce a more suitable overall funding structure.
This is particularly relevant where a business has accumulated several short-term facilities with different repayment schedules.
Looking at the company’s total borrowing position rather than considering each facility independently can provide a clearer picture of its funding requirements.
4. Consider the Different Types of Business Finance
A conventional term loan is only one of many ways a business can raise capital.
Depending on the requirement, businesses may consider:
Business Loans
A fixed amount of capital generally repaid over an agreed period.
Working Capital Finance
Funding designed to provide additional liquidity for day-to-day business requirements.
Revolving Credit Facilities
Flexible facilities that allow businesses to draw, repay and potentially redraw capital within an agreed limit.
Asset Finance
Finance used to purchase or refinance vehicles, machinery and other business assets.
Invoice Finance
Funding linked to outstanding customer invoices, potentially helping businesses release capital before customers pay.
Merchant Cash Advances
Funding where repayments are generally linked to card revenues.
Commercial Mortgages
Longer-term finance for purchasing or refinancing commercial property.
There are also more specialised structures for acquisitions, development projects, tax liabilities, trade requirements and other circumstances.
The appropriate product depends on what the business is trying to achieve.
5. Prepare the Required Documentation
The exact documentation required varies between lenders.
For relatively straightforward applications, lenders may initially request:
- Recent business bank statements
- Basic company information
- Details of the funding requirement
- Details of existing borrowing
More substantial transactions may require:
- Filed accounts
- Up-to-date management accounts
- Cash flow forecasts
- Financial projections
- Asset schedules
- Details of directors or shareholders
- Information regarding existing facilities
- Transaction-specific supporting documents
Providing accurate information from the beginning can help reduce unnecessary delays during underwriting.
6. Understand What Lenders Assess
Different lenders have different underwriting criteria, which is one reason a business may be suitable for one lender but not another.
Factors commonly considered include:
Trading history — how long the company has been operating.
Turnover — the scale and consistency of revenue.
Profitability and cash generation — the company’s ability to support repayments.
Bank account conduct — how the business manages its existing cash flow and commitments.
Existing debt — current borrowing and repayment obligations.
Credit profile — the credit history of the company and, where relevant, associated individuals.
Purpose of funding — why the capital is required.
Security — whether assets or other security support the proposed facility.
No single factor necessarily determines the outcome of an application. Lenders generally assess the overall risk and affordability of the proposed transaction.
7. Compare More Than the Interest Rate
The cheapest headline rate does not automatically represent the most appropriate facility.
Businesses should consider the complete structure, including:
- Interest or financing cost
- Arrangement fees
- Repayment frequency
- Facility term
- Security requirements
- Personal guarantees where applicable
- Early repayment provisions
- Flexibility to draw additional funds
- Covenants or other conditions
A facility with a slightly higher headline cost but substantially greater flexibility may sometimes be more appropriate than the lowest-priced option.
The objective should be to understand the total commercial impact of the facility, not simply one advertised percentage.
8. Submit the Application
Once the requirement has been established and the appropriate funding route identified, the application can be presented to suitable lenders.
The complexity and speed of this process varies significantly.
Some straightforward business finance applications can receive an initial decision relatively quickly. Larger transactions may involve detailed underwriting, additional financial information, valuations, legal work or negotiations around the structure of the facility.
Presenting the requirement clearly and providing requested documentation promptly can help keep the process moving.
How Long Does a Business Loan Application Take?
There is no universal timeframe.
Some relatively straightforward facilities can progress from application to funding quickly, while larger or more complex transactions may take considerably longer.
Factors affecting the timeframe can include:
- Amount being borrowed
- Type of finance
- Complexity of the business
- Availability of financial information
- Security requirements
- Valuations
- Legal requirements
- Lender underwriting
Businesses working towards a specific transaction or deadline should therefore consider their funding requirements as early as reasonably possible.
Can a Business Apply With Existing Debt?
Potentially, yes.
Having existing borrowing does not automatically prevent a company from obtaining additional finance. However, lenders will usually consider the existing commitments when assessing affordability and the overall financial position of the business.
Where several facilities already exist, refinancing may also be worth considering.
This can involve replacing one or more existing facilities with a new structure designed to simplify repayments, reduce short-term pressure or better align borrowing with the company’s current requirements.
Can a Business With Adverse Credit Obtain Finance?
Adverse credit does not necessarily mean that funding is unavailable.
The significance of previous credit issues depends on factors such as their severity, how recently they occurred, the circumstances surrounding them and the overall strength of the business.
Different lenders also have different risk appetites.
Rather than assuming an application will automatically be declined, it can be useful to understand the company’s current credit position and consider lenders whose criteria are appropriate for the circumstances.
Applying Directly or Using a Finance Broker
Businesses can approach lenders directly or work with a commercial finance broker.
Going directly to a lender may be appropriate where a business already knows exactly which provider and product it requires.
A broker can be useful where the business wants to compare options, has a more complex requirement or is uncertain which lenders are likely to be suitable.
The value of the process is not simply finding a lender willing to provide finance. It is identifying an appropriate structure and presenting the requirement to lenders whose criteria and appetite align with the transaction.
Preparing Your Business for Funding
A strong funding application begins before the application itself.
Understanding the amount required, organising financial information, reviewing existing commitments and establishing a clear purpose for the capital can make it easier to determine which funding options are appropriate.
For straightforward requirements, this preparation can help make the application process more efficient. For larger or more complex transactions, it can also help ensure that the proposed funding structure supports the wider objectives of the business.
