Business bank loans offer entrepreneurs and small businesses access to commercial finance. Whilst they are not the only source of funding, they are one of the most popular. This guide gives you the lowdown on how they work and how to apply for one.

Is a bank loan for you?

Bank loans are only one form of financing and are not ideal for many situations. Larger loan amounts are secured which means you could lose substantial business or personal assets should your firm fail. Consider the merits of private equity, government grants and other types of finance before applying for a business bank loan. You may also wish to look into the Enterprise Finance Guarantee (EFG) to see if you qualify. Also, make sure you’re at the right stage before applying; the investment must be required for something. Don’t just apply because for the sake of increasing liquidity.

What types of loan are available?

Business bank loans offer two main types of loan: flexible loans and fixed loans. Flexible loans are tailored products aligned with your business needs, offering a choice of repayment terms and interest rates. Fixed loans have pre-determined rates of interest, inflexible payment structures and tend to be more widespread. Interest rates typically vary between 7-12% but will vary based on fluctuations of the base rate. Repayment periods tend to be between one and 15 years depending on the capital borrowed.

Will I need to secure my loan?

This varies depending on the bank and the loan offered. Unsecured loans are often for smaller amounts and attract higher rates of interest to increase the bank’s profit. Larger loans will normally require security, typically assets or business property. In some cases, the company directors can secure the loan on personal property; this personal guarantee can be contractually limited to change once certain conditions are met. If you are a sole trader or partner, you are automatically liable for company debts; this must be considered when taking out a loan.

How do I apply for a loan?

Applying for a business bank loan is a considerable step. Preparing fully is essential so that your case is a strong as possible and you have the maximum chance of securing the finance you require. Alternatively, you may also want to read why banks reject loan applications to make sure you don’t make any common mistakes. Once you’ve prepared fully, it’s just a case of finding the most appropriate product for your needs; don’t skip this step as it’s important to match the loan to your requirements. You can often apply online, but some may prefer to visit the bank in person.

 

How long will it take for my loan to be processed?

Loans are not instantaneous and have substantial lead time, generally between three and six months depending on the institution and the loan amount. This is why it’s important to apply in plenty of time; do not wait until you are struggling financially before you apply. Not only is it possible you’ll fail before the loan is approved but bank managers may take your urgency as a sign of poor business acumen and reject your application as a result.

Preparing your application

Before you apply for a loan there’s a lot that needs to be done. Producing a clear and cogent plan as to why you require financing is a lot harder than it sounds. Not only do you need to prove to the bank that the return is going to make a profit, but you also need to show that you have the acumen to make the business a success. You’ll need to bring many documents to the meeting, including business and personal histories, profit forecasts, five-year plans and expected ROI on the loan. CAMPARI: preparing for a bank loan is a must-read to ensure you bring everything you need.

Approaching a bank

Once you’ve completed the necessary preparation it’s time to approach a bank. How you do this will depend on the bank, the loan amount and the type of company you represent. Consider approaching a bank in person to make a great first impression. Dress impeccably and double-check your availability and that of any partners: you don’t want to have to rearrange an appointment. For lower amounts, and larger banks, you may wish to follow a standard online or paper application process. Double check all spelling and grammar before you submit the application.

Meeting with the bank

Your bank will need to know some basic details initially:

  • How much money you need
  • Whether you can secure your loan against business or personal assets
  • How long you want the repayment period to be.

You need to explain the rationale behind your choices so be prepared to go into depth. Your bank may also want to know about you personally, your business, and other key information such as your business model and five-year plan. Make sure you have multiple copies of all documentation and that it is all formatted clearly and professionally.

Check the small print

Banks differ in the way they make a return from commercial loans. Some charge interest only whilst others include charges for setting up the loan and late payment penalties. You may also have to pay ‘redemption penalties’ if you choose to pay off your loan early. Ask the bank manager to total up how much the loan will cost, including all fees payable. This should give you an idea of how much the loan will cost your business across the entire repayment period. Compare quotes with other banks if necessary.

Wait for a decision

Applying for a loan is not an instant process and you’ll typically need to wait between three and six months to receive the capital. Try not to appear anxious or pressured as this will decrease the likelihood of your loan being accepted. Use the time to strengthen your business and plug inefficiencies so that when the capital arrives your firm will be in the strongest position to use it profitably.

What alternatives are available?

Bank loans are typically for amounts between £1000 and £25,000. If you require more money, it’s unlikely a bank will lend to you. Private equity is a good option for larger amounts, where you exchange a percentage share in your company for a lump sum. Please read our guide to private equity for more information. Government grants are another option; these are generally for much smaller amounts but do not require repayments. Finally, you may wish to approach friends and family for finance or use a business credit card.

Rejected?

Being rejected for a business bank loan can be extremely disappointing but it doesn’t have to leave you in the slumps. By working out where your application went wrong, and fixing these weak areas, you can return to the bank with a stronger case and a greater chance of getting the capital you require. If necessary, ask an experienced mentor to help you produce the strongest possible application – it’ll be worth it when the bank says yes. Take a look at our guide to why banks reject loan applications to see where you might have gone wrong.

Ready to apply?

Please see how to apply for a business bank loan for details of the application process.

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