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A Comprehensive Guide To Small Business Loans

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You’re ready to grow your business but are suddenly confronted with a big financial hurdle to leap over. If this sounds like a situation you’re all too familiar with, then it may be time to get a small business loan. But what are they and how can they help your business flourish?

This guide takes you through the process of what constitutes a small business loan, how to qualify for one, the types of small business loans available, the benefits of using loans to grow your business and essential aspects to consider before taking the plunge.

What is a Small Business Loan?

A common problem encountered by business owners is ensuring cash flow is maintained. This is something that can impact upon the daily running of your company through late payments, bad debts or immediate purchasing requirements.

Small business loans remain one of the most straightforward forms of finance for businesses looking for a short-term cash injection. They can be secured or unsecured and range in value from £1,000 to over £200,000.

Business loans are the vehicle which makes your business more profitable and widens the scope of your operations.

A small business loan can be used for:


  • Developing the business offering
  • Expanding new areas of the business
  • Working capital
  • Acquiring new plant or machinery
  • Buying out a partner
  • Debt restructuring
  • Cash flow
  • Research and development
  • Product testing

Short-term or long-term business loan?

When cash flow becomes tight, you may need a quick injection of cash in order to get you to the end of the month or end of the year.

Knowing when you will be able to repay it back is important in getting the right type of loan, either short-term or long-term.

Short-term business loan

Short-term business loans no longer than 6-12 months. They give organisations looking to overcome immediate obstacles a quick boost in relation to cash flow.

The main advantage of a short-term loan is that repayments only have to be made for a limited period. Due to the short time scales involved, when you pay loans off quickly you pay less interest on your borrowing. You can also benefit from an improved credit rating at the end of it.

Medium/long-term business loan

This can be taken out over a much longer period of time, typically 1-5 years, and often up to 10 years. The total amount of interest you will pay back will be more, but the monthly repayments will be more manageable.

If you don’t think you can pay off your borrowing within a year, instead of over-stretching your finances you could take the longer term loan.

How Do I Qualify For A Small Business Loan?
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Tricky economic conditions have made it difficult to borrow money from traditional institutions such as banks, but it still can be an option.

Applying for a business loan will mean calculating how much you are eligible for, what you can afford to repay back and how long you need the loan.

In order to get a small business loan your lender is going to ask you important questions like:

– How long have you been in business?
– How much money will you need?
– Does your business qualify for a loan?
– Will you need security?
– How quickly do you need it?
– When can you pay it back?

Your financial provider will also be analysing your credit score and looking into your credit history to identify the potential risks involved in lending to you.

Lenders base their qualifying criteria on five pieces of financial and business information:

Reasonable credit history

The better your credit history is, the more confidence a lender has in you. If you have a poor credit history, you’ll need to be prepared to repair this damage with strong explanations.

A business plan

Having a strong business plan is usually the starting point for a successful business. It should be flexible, accurate and realistic. It should also take into account your business strategy, with and without investment.

Verified business history

The impact you have on your business makes a huge difference. This includes your business history and previous performance. Lenders do not want to invest in a business run by someone who continually makes the same mistakes.

Profit and loss statements

You should already have these, but make sure they demonstrate the solidity of your current position and how the investment will help improve it.

Compelling reasons for the loan

You’ll need to know what loan you need and exactly what you are going to do with it. You should be able to answer clearly what you need the money for, how it is going to be used and what the likely returns on this investment are going to be.

Why Small Business Loans Are Essential For Growth
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Growing a business requires hard work, perseverance and knowledge of funding options.

Whether or not you choose small business loans or any other type of finance, being aware of their benefit can make growing your business smoother and trouble-free.

A 2015 government study looked into ways in which small businesses encountered obstacles to growth. It concluded that growth performance was much stronger in businesses that had looked to secure some kind of financial investment as opposed to those that had not.

Businesses that turned away from seeking capital investment, encountered more resistance to growth opportunities and subsequently experienced slower business growth than those that did not.

There are four funding options available to businesses seeking growth:

– Investing profits back in
– Taking out a loan
– Offering equity to investors
– Free funding i.e. grants

However, only one option is universally available to every business. Every business can apply for a business loan, whether it is secured or unsecured.

It doesn’t matter if you are a limited company, a sole trader, a corporation or a family business.  If you do your homework and prepare your accounts, reports and projections properly you will find a lender willing to offer you a business loan.

Business loans are essential for growth whether it be start-ups or established corporations.

Types of Small Business Loans

There are different types of small business loans and some of them are packaged as products in their own right.

Start-Up Loans

When you’re starting out you might find a start-up loan offered to you. They are usually for amounts between £1,000 and £25,000 and can provide you with capital to pay for stock, wages and to manage cash flow.

They might require certain securities made against it depending on the perceived risks by the lender. They nearly always come with a big stack of application forms and a lengthy assessment of your credibility, both personal and business.

Business Loans

A business loan will allow a lender to loan a certain amount of money, over a certain period of time, with fixed monthly (or a different frequency to suit) payments subject to a fixed interest rate.

A small business loan can be as short as 3 months (although 12 months is more typical) and a typical unsecured loan might be anything from £5,000 – £100,000 – a likely amount for a small business seeking to acquire assets or cash flow for expansion.

When it comes to short-term finance a business loan can help cash flow and also help carry you over when times get tougher. Depending on what a business needs the funding for, it might require a much larger sum over a longer period of time.

Business Cash Advance

Business cash advance is a type of secured cash boost for your business, very different to standard types of business finance.

You receive a cash advance, which is paid back as and when your customers start purchasing your goods and services. Payments are made back to the lender at the agreed rate – say 10% of the value of the product, which becomes the method of repaying the cash advance loan. The amount of interest charged is fixed, no matter how long it takes to repay the loan.

The benefit comes in being able to pay back your loan at a rate that is suitable for the success of your business. It is popular with retail companies that don’t match up to the qualifying criteria the banks require for a standard bank loan and for other retailers that have a significant number of daily transactions.

Peer-To-Peer Loans

Peer-to-peer lenders allow you to borrow money from individuals or groups of people, with greater levels of discussion and flexibility than banks. These loans might look the same as a standard business loan from a bank or a traditional lender and might even be either secured or unsecured. However, they will be offered subject to the criteria of the peer-to-peer lender and not through traditional black and white high street lending criteria.

Tips For Choosing The Best Small Business Loan For You
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Most types of business loans allow you to set how much you want to borrow and for how long. Some offer flexible repayment options, while others come with no early repayment fees. Any company can apply for a business loan, it doesn’t matter how big or small you are.

Upon consideration of which business loan is right for your business, contemplate the following advice:

Review your finances regularly

Before you choose your financial options, make sure you thoroughly look through your finances to ensure you are in the best position to be approved for a loan. Lenders require lots of documentation and financial information that proves there’s a good chance of being paid back.

Debt isn’t a bad thing

It is often thought that debt must be avoided at all costs. Whilst we would always recommend borrowing responsibly, it is worth remembering that debt can be used to your advantage to help preserve working capital, or support investment in assets or properties that will ultimately help grow your business, and keep it profitable.

Most big businesses would have used debt sensibly to secure and maintain a competitive edge.

Borrowing from friends and family

You should act with caution whenever dealing with finance provided by those nearest and dearest to you. In the early stages of a business, many do self-fund this way, but there are obvious drawbacks including risking personal relationships and allowing these ‘investors’ into the decision-making arena of your business.

Search for the right finance provider

There are many different avenues that you can go down in order to secure finance for your business. It is often tempting to think that the best rates and deals lie with the big lending banks and price comparison sites. Larger lenders tend to have the most rigid lending criteria, which means that SMEs sometimes struggle to get the best rates.

It’s always worth looking at alternative lenders who can take a look at the whole market for finance options. There are many niche lenders who all have their own personal financial areas they excel at, which can be quicker and cheaper to deal with than the mainstream banks.

If you’re considering a small business loan for your startup or an established business, request a call back from us to chat about your options with no obligation!


Picture of Bobby Turner

Bobby Turner

Marketing, SEO & Stats Lead Content Expert. 12 years working with B2B, e-commerce businesses. Bobby has written for numerous accounting, financial, hospitality, and fashion publications worldwide.

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