Running a business has several challenges, and one of the common issues is managing the costs of starting and maintaining a company. This can include one-time costs like payroll or ongoing expenses.
It’s common for companies to experience cash flow issues, but a loan can help resolve these issues while maintaining your operations running smoothly.
Choosing the right startup business loan can be a complex process, as various types of loans are available today. However, we have created a step-by-step checklist to assist you in choosing the loan that best fits your business requirements.
Hire financial advisors
Work with a UK-based accountant for tax, accounting, payroll, & EIS/ SEIS needs.
Table of contents
● 6 Types of loans for businesses
● Checklist to choose the best UK business loan
● Final thoughts
6 types of business loan
1. Term loans
These traditional loans offer lump sum cash upfront, repaid over a predetermined time with interest.
2. Lines of credit
These flexible loans allow entrepreneurs to raise capital to a pre-approved limit as needed. Interest is only applied to the sum borrowed.
3.Equipment loans
These are primarily designed to finance the company’s equipment purchases. The equipment itself is generally used as collateral for the loan.
4. Small Business Administration (SBA) loans
These are government-backed loans that are intended to assist small businesses access funding. They often have more flexible payment options and lower interest rates than bank loans.
5. Invoice financing
This is a type of loan where a lender gives funds to a company based on their outstanding invoices. The lender gathers payment from the targeted consumers, with the business gaining the remaining funds excluding a fee.
6. Merchant cash advances
These loans also offer a lump sum amount, which is repaid through a proportion of the business’s daily sales. Due to high-interest rates and fees, they can be more expensive than other methods of loans.
Checklist to choose the best UK business loan
1. Determine your borrowing needs
When getting a loan for your business, you must determine your specific borrowing needs. This includes deciding how much funds you need and what you need the finances for.
To begin, evaluate the intent for which you will need the funds. Are you looking to finance a huge, one-time expense like purchasing new equipment or growing your company? Or do you need continuous access to funds to cover day-to-day expenditures or to manage cash flow?
Once you have created the borrowing objective, you must evaluate how much finances you need. Considering all associated fees and expenses, it is important to be accurate and precise in your calculations.
2. Verify your credit rating
Checking your credit score is an essential process for getting a business loan. Your credit score is a numerical depiction of your credit ratings, and lending institutions use it to assess your ability to repay the loan. A good credit score can help you secure a loan with better terms and lower interest rates.
Check your credit report for any inconsistencies or factual errors, as they might negatively impact your credit score. If you find any errors, you can dispute them with the credit reporting organisation.
Improving your credit rating can take time, so beginning early in the loan application process is essential. A higher credit score can result in better loan options and reduced costs over the life of the loan.
3. Research lenders
When evaluating lenders, it is vital to consider various aspects that can affect the terms and overall cost of borrowing.
Additionally, it is essential to consider the loan options available from each lending institution, as different lenders may offer various financing that suits your business requirements. It is also critical to assess interest rates offered by other lending institutions, as lower interest rates might save you several hundred dollars throughout the loan.
Further, it is essential to give attention to any extra charges associated with the loan, like origination fees or prepayment penalties. By carefully researching lenders, you can make an informed choice and find the lender that provides the ideal terms for your business loan.
4. Check lenders’ customer support
When selecting the perfect business loan, efficient customer service is key. You want to deal with a flexible and supportive bank, particularly when responding to questions about your loan application, the terms of the loan, and the repayment procedure.
One way to assess a bank’s customer support is by researching various reviews and ratings from other entrepreneurs who have worked with that bank. Check for remarks on the lender’s timeliness and readiness to collaborate with clients to fix any problems that may emerge.
5. Gathering Documentation
Gathering documentation is an essential step in the loan application procedure. Lenders require paperwork to analyse your company’s cash flow and financial health and verify that you can repay the loan.
Financial statements are one of the most necessary records, as they give financial institutions a clear picture of your business’s financial health. These statements typically involve your income statement, balance sheet, and cash flow statement.
Tax returns offer data about your business’s income and expenditure, which are used to verify information in your financial statements. Lenders may also request personal tax returns if you are a sole owner or own a small company.
A business plan is another essential document underlining your firm’s objectives, strategies, and financial plans. This document can assist financial institutions in understanding your company’s possibility and assessing its risk level.
6. Decide and apply
Once you have selected the loan provider, you can continue submitting your loan application.
If your loan application is accepted, you can use the financing to boost your business. However, if your application is rejected, do not give up hope. Many other financial institutions and loan options are available, and you can always apply elsewhere or consider an alternative type of loan.
Hire financial advisors
Work with a UK-based accountant for tax, accounting, payroll, & EIS/ SEIS needs.
Final thoughts
Selecting the right financial institution for the business loan requires patience and time and is an important decision.
The bank you choose will be your partner for an extended duration as you repay the loan. Hence it’s crucial to follow these steps systematically to select the most appropriate bank for your business loan.
