Small business owners say they are being straitjacketed by banks, having to take out personal guarantees for loans to growth their businesses.

Acting on their behalf, the Federation of Small Businesses (FSB) has issued a super-complaint to the Financial Conduct Authority (FCA) to highlight the harsh lending practices of banks that excessively demand personal guarantees for business loans.

Personal guarantees can be a “straitjacket” on business growth, forcing entrepreneurs to put their homes or other assets at risk when taking out finance.

What is a personal guarantee on a business loan? – A significant portion of business lending is through unsecured loans – these often require a personal guarantee. This article looks at what they actually are and their pros and cons

In some cases, small business owners take out insurance against having to use the personal guarantee, adding to the cost of the loan.

Personal guarantees can be particularly paralysing when they are applied to small loans – leaving many business owners more likely to abandon business growth plans or push them into being over-cautious in their decision-making, deterred from making bold choices, argues the FSB.

Around 45 per cent of business owners back away from finance if a personal guarantee is attached, according to a May 2021 Purbeck Personal Guarantee Insurance survey.

Currently, the FCA cannot get involved in these type of lending decisions, which are outside of its remit. The FSB wants this to change.

A limited company is meant to limit the liability of company directors, but personal guarantees most often apply to loans taken out by companies and guaranteed by their directors – corrupting the concept of limited liability.

Martin McTague, national chairman of the FSB, said: “Put yourself in the shoes of an entrepreneur who’s created a promising business and is keen to grow. You approach your bank for a small loan, but they say you can only have the money if you sign a personal guarantee which would ultimately put your family home or other assets at risk. This is a straitjacket on small business growth.

“It is no wonder that many small business owners in that position are telling us they are choosing to avoid external funding which they could be using to capitalise on new opportunities.

“It’s bad news for the individual business – and, zooming out, it’s bad news for the economy as a whole, at a time when we’re looking for economic growth and productivity gains.”

More on personal guarantees

SMEs don’t understand personal guarantee in business loans – There is a fundamental lack of understanding regarding loan conditions from small business owners – specifically personal guarantees, a new study finds.

The post Personal guarantees for loans stifling growth, say business owners appeared first on Small Business UK.

As a small business owner you might be thinking about loans as a way of starting or growing your company.

Unfortunately, loans are notoriously complicated, riddled with complex terms and teeny tiny small print. Let us demystify the process and show you some of the best small business loans around.

Is a small business loan right for me?

It depends what type of business you have, how developed you are and what you need the loan for.

For example, some loans aren’t great for seasonal businesses as making repayments during off-peak times of year will be challenging.

In this case it’s worth considering other funding options like friends and family, crowdfunding, incubators, venture capital, small business grants or switching your business bank account. Check out our rundown of the best business bank accounts open to UK SMEs.

If you want to go ahead, you can do a few things to improve your chances of success. Make sure you’re as clear as possible on how much you need to borrow and what exactly the loan would be used for. Work the loan into your business plan and have a cash flow forecast ready, making sure you include loan repayments.

Having these documents is particularly beneficial to new businesses with a shorter trading history. It’s worth asking an accountant to glance over them before you apply for the loan.

Get your website and social media in shape as the people assessing your business loan may be looking at them too.

Each provider will have their own eligibility criteria but generally you and your business should be UK-based, you need to be over 18 and not in the process of bankruptcy.

Can I get a small business loan with bad credit?

It is possible, though you’re more likely to be limited to smaller loans and/or higher interest rates. The rate of increase depends on the loan and the risk to the lender.

If you’re worried, you can seek out a firm who will perform a ‘soft’ credit check, so it won’t affect your credit score. Remember that lenders will often need details of partners, directors, members or signatories of your business and if there are any major blemishes on their credit histories, that could affect your chances of securing funds.

Ask a credit checking firm for your credit report if you don’t know how you’re doing. Some of the bigger players offer free trials.

Secured vs unsecured loans

A secured loan lowers the lender’s risk by securing it against an asset or guarantor. So, if you put up your home as collateral in a secured loan, the lender can take possession of it if you fail to make repayments on your business loan. The upshot of a secured loan is that you can nab higher loan payments.

Unsecured loans don’t have a guarantor or asset, making them riskier for lenders. To cope with said risk, they tend to lend out smaller amounts over shorter time periods.

Read more at The difference between secured and unsecured business loans.

High street banks

High street banks will provide the standard loans you’ll recognise – you borrow money upfront and pay it back over a pre-agreed term with interest.

We’ve listed the key products below.

HSBC

Loan amount: £1,000-£25,000

Repayment period: 12 months–10 years

Eligibility: You will need a cash flow forecast and business plan along with management accounts and historic accounts.

You don’t need an HSBC current account to apply for a small business loan. There are no charges for additional repayments to your loan, but you can have a three-or-six-month repayment holiday at the start of the loan or take a January payment holiday during each year of your loan.

Santander

Please note that Santander isn’t offering loans at the moment. However, they are offering assistance to existing loan customers.

Barclays

Loan amount: Up to £100,000

Repayment period: 1-10 years

Eligibility: You must be a sole trader, partnership, limited company, charity, club or association.

With Barclays, you can borrow up to £100,000 over 1-10 years, taking a six-month repayment holiday at the beginning of your loan if you wish.

Secured loans of up to £25,000 are also available, allowing you to stretch your repayments to 20 years and go interest-only. If that doesn’t work for you, you can opt for its asset finance product.

RBS/NatWest

Loan amount: £1,000 to £50,000

Repayment period: 1-7 years

Eligibility: You must have a good credit rating without a history of CCJs or bankruptcy.

As they’re connected, the offering is the same for RBS and NatWest. You will need to provide three years’ address history. Unfortunately repayment holidays aren’t available but you can make fee-free early repayments and do fee-free early closures.

Compare RBS and NatWest business loans with NerdWallet

Lloyds

Loan amount: £1,000-£50,000

Repayment period: 1-25 years

Eligibility: You must need this loan for business use and must be applying for a minimum of £1,000. You must also be a sole trader, partner or director with authority to borrow on behalf of your business.

There are no arrangement fees or early repayment costs. 

You’ll need to provide proof that you can make your repayments on time along with details of any other business loan that you have. Oh, and if you’re a limited company or limited liability partnership, you need to provide a guarantee.

Yorkshire Bank

Loan amount: £25,001-£10,000,000

Repayment period: Up to 15 years

Eligibility: Much like RBS and NatWest, the Clydesdale and Yorkshire Bank offerings are identical.

You must be 18+ and have a UK-based business. An arrangement fee may apply.

Compare Yorkshire Bank business loans with NerdWallet

TSB

Loan amount: £1,000-£1,000,000

Repayment period: 1-10 years

Eligibility:

You must be a sole trader, partner or director who requires the loan for business use.

You have a choice of a base rate or fixed rate loan depending on your business needs. The fixed rate offering lets you borrow between £1,000 and up to £1,000,000 over one to ten years. Loans are available on a secured or an unsecured basis and the arrangement fee can be up to 1.5 per cent depending on how much you borrow.

Fixed rate loans can be taken on a secured or unsecured basis. Capital repayment holidays may also be available.

Base rate, as its name suggests, relies on the Bank of England base rate which is somewhat more precarious. It’s for loans from £25,001 and can be repaid over one to 25 years. Be aware that security might be required.

Metro Bank

Loan amount: £2,000-£60,000

Repayment period: 1-5 years

Eligibility: You will need to have a business bank account with Metro Bank and probably some security in the form of assets or a guarantee from a third party. They’ll generally consider businesses with over £2m turnover but can make exceptions.

Metro Bank only has one loan product for all businesses. 

Digital banking platforms

Not many digital banking platforms offer business loans. Though these providers offer other services like foreign exchange or savings accounts, you’ll have to sit tight for more packages.

Starling Bank

Loan amount: £25,0001-£250,000

Repayment period: 12-72 months

Eligibility: Starling Bank’s loan is open to limited liability companies and limited liability partnerships – sole traders cannot apply. Non-Starling customers can apply but they must open an account and make it your primary business banking account. Your business must have been trading for at least 24 months.   

A personal guarantee will be required as security for this unsecured loan. A one-off fee of 4 per cent is required at the point of drawdown.

Monzo

Loan amount: Up to £25,000

Repayment period: You can choose how long your repayment period is

Eligibility: Only open to sole traders who are existing Monzo Business customers. Must be aged 18+.

With the Monzo loan you can change your repayment period fee at no extra cost and there are no early repayment fees to worry about. Your loan will sit alongside your savings Pots feature.

No late repayment fees will be charged – just catch up in the app. However, you should know that Monzo might report these late repayments to credit reference agencies which could negatively affect your credit score.  

Tide

Loan amount: £1,000 – £500,000

Repayment period: One month – 15 years

Eligibility: Must be a Tide business banking customer

Connect your business bank account and compare unsecured business loans without affecting your credit score. Apply in five minutes and your loan could be with you in 24 hours. You’ll need to supply your bank statements for the past year – can do this by connecting via Open Banking.

Tide also offer start up loans, business cash advance, invoice finance and other partner products.

Cashplus and SumUp also offer cash advances as add-ons to their business bank account offerings, so you’ll have to apply through them.

12 of the best digital banking platforms for small business in 2023 – Considering a digital banking platform over one of the traditional stalwarts? We’ve picked out 12 of the best for your perusal

Alternative providers

Other firms can provide finance options for your small business.

They’ll either be in the form of unsecured loans or an alternative form of finance which is more flexible. Here are the three other types of lending mentioned in the table below.

Cash advance

Rather than loans, some firms offer business cash advances. With these, you borrow a sum upfront and you pay back a pre-agreed amount which is taken straight out of your card takings, so repayment is more flexible.

Cash flow finance

This is a loan which is backed by a firm’s expected cash flow and can be either short or long-term.

Asset finance

Asset finance can be used to get equipment, machinery and vehicles without upfront costs. Typically, the lender will be paying for the asset and you’ll pay a recurring fee for a set period in order to use the asset.

365 Finance (formerly 365 Business Finance)

Loan amount: £10,000 – £40,000 (cash advance)

Repayment period: Flexible

Eligibility: Your business must have been trading for at least six months and your average credit card and/or debit card sales must total at least £10,000 a month.

365 Finance offer a cash advance called Rev&U as opposed to traditional loans. You get a relationship manager by taking out this finance.

Compare 365 Finance loans with NerdWallet

Lombard

Loan amount: Dependent on loan

Repayment period: Dependent on loan

Eligibility: Dependent on the loan

Lombard offers a range of finance options including hire purchase and contract hire. The finance can fund a variety of improvements like tech, manufacturing and specialist assets. Lombard has relationship managers who specialise in the manufacturing, technology, green energy, commercial vehicles, agriculture, aviation and marine sectors.

Compare Lombard business loans with NerdWallet

Liberis

Loan amount: Dependent on your average monthly revenue and how long you’ve been trading (cash advance)

Repayment period: Flexible

Eligibility: Dependent on your average monthly revenue and how long you’ve been trading

Compare Liberis business loans with NerdWallet

Fleximize

Loan amount: £5,000-£500,000 (secured or unsecured)

Repayment period: Up to 48 months

Eligibility: On Flexiloan you’ve got a choice between two packages: Flexiloan and Flexiloan Lite.

To be eligible, you must have been actively trading for at least six months and have a minimum monthly turnover of £5,000. Unsecured loans of up to £250,000 are available to businesses in Northern Ireland and Scotland.

With Fleximize you can land a loan with penalty-free early repayments and repayment holidays.

Compare Fleximize business loans with NerdWallet

Iwoca

Loan amount: £5,000-£500,000 (unsecured)

Repayment period: Up to 24 months

Eligibility: Open to sole traders, partnerships and limited companies. Start-ups have a maximum credit limit of £10,000.

Iwoca offers borrowing ‘for cash flow, stock or investments.’ Interest rates start at 2 per cent a month, depending on your business.

Compare Iwoca business loans with NerdWallet

Start Up Loans

Loan amount: Up to £25,000 (unsecured)

Repayment period: 1-5 years

Eligibility: Aimed at companies who have been trading for less than 36 months and can’t get finance from other providers.

This government-backed loan has a fixed interest rate of 6 per cent per annum. It’s not just funding: you get 12 months of free mentoring too along with pre-loan support to help you create business plans and cash flow forecasts.

Compare Start Up Loans business loans with NerdWallet

Funding Circle

Loan amount: £10,000-£500,000 (secured or unsecured)

Repayment period: 6 months-6 years

Eligibility: You must have been actively trading for at least one year

Partnered with the British Business Bank, Funding Circle provides secured and unsecured loans with rates from 9.8 per cent per year and you can make full early repayments at no extra cost.

Compare Funding Circle business loans with NerdWallet

Nucleus

Loan amount: £25,000-£250,000 (cash flow finance)

Repayment period: 3-60 months

Eligibility: 

You must have been trading for a minimum of three years.

This cash flow finance offering goes up to £250,000, repayable over three months to three years. To apply you’ll need to have a business registered in England and be a homeowner in England. You need to stump up three months of bank statements and a full set of business accounts. It’s geared towards small businesses who would benefit from cash flow payments, like expanding premises, recruiting or filling a cash flow gap.

Nucleus also provides property finance (term loans, bridging loans, interest only loans) and revenue-based loans. Each has different eligibility and required documents to set up.

Compare Nucleus business loans with NerdWallet

Next steps

SmallBusiness.co.uk is working in partnership with trusted lenders to help you find the best finance deals.

If you’re looking for fast funding for your business, complete this quick application to access our panel of business lenders.

The post Best small business loans in the UK appeared first on Small Business UK.

Running a successful small business requires healthy cash flow, sustainable growth, adaptability, and forward-planning. Naturally this may mean you require an extra injection of cash from time to time.

Business loans are one of the most common sources of finance for SMEs and with the growth in alternative finance providers, such as Capify, over the past decade, there are now loans designed to cover the specific needs of almost every organisation, no matter what shape or size.

Whether you want to hire more staff, ease cash flow issues, renovate your premises or even invest in new equipment, a business loan may be the right option for you. But where do you start?

In this guide we share our top tips on how to get a business loan, and the five key steps you should take to get the type of loan you really need. These include:

1. Creating a business plan
2. How to research available lenders
3. Determining your chances of getting approved (Eligibility)
4. Making sure you have all the necessary documents
5. Reviewing the proposed loan carefully

But first, let’s look a bit further into small business loans and the things that business owners looking for finance need to be aware of.

What is a small business loan, and how does it work?

A small business loan is designed to give SMEs access to finance to invest in their business, whether that’s to fund a growth project or simply to boost cash flow. It means a sum of money provided by a lender, which is paid back, plus interest, over a set period of time.

Small business loans differ from other loans because they are tailored around the specific needs of smaller businesses. The specifics of the loan, including the size of the loan, the total amount repayable, repayment period and eligibility, will differ from one lender to the next and will depend on the type of loan you take out.

Therefore, choosing the right loan for your company requires careful thought and planning, and will depend on your ambitions as a business owner or manager, as well as the sector you operate in.

Funding is available from a range of different sources including:

• The UK government
• Local government or regional authorities
• Community Development Finance Institutions (CDFIs)
• Banks or credit unions
• Finance brokers
• Peer-to-peer lenders (P2P or ‘crowdlending’)
• as well as through alternative finance specialists.

While the lender and business will differ, there are some important steps every business can take to help get a small business loan.

To be in with the best chance of securing a loan for your small business, check out our five steps below.

#1 – Create or update your business plan, and decide what loan you need

While the banks and traditional lenders may require the submission of a business plan and formal interview, many of the alternative lenders only require you to complete a simple online application.

However, the creation of a business plan shouldn’t be underestimated and can be used to help you plan ahead, understand your competition, and target your customers more effectively, as well as acting as a good benchmark for whether you are on track for success.

Before starting your search for a lender, you need to decide the purpose of the loan; is it to help manage the cashflow of the business or is it for a more specific purpose such as funding a new piece of equipment? Some loans can be used for multiple purposes, while others are only for specific situations.

Therefore, it’s important you consider what you plan to use your loan for and how much you need to borrow. This will determine if you need a short term or long-term loan, and whether you need the loan to be secured or unsecured.

#2 – Compare and research small business lenders

With such a wide range of small business loans and providers to choose from, before you begin the application for your loan you need to consider the lender. Doing this will ensure you have all the information you need in order to select the right loan for your business.

Top Tip: If you apply for a loan and are unsuccessful this can negatively impact your business credit score, so researching the lender, and its eligibility criteria, is an important first step

Here are some simple questions to ask yourself to help you choose the right lender for your small business:

• Look at the terms of the loan: work out how much will you have to repay by looking at the total amount payable
• Look at the repayment frequency: will they expect you to repay, daily, weekly, or monthly – the more frequent the payments, the more manageable they could be for your business, and this could have a positive effect on your cashflow
• Check out their customer service: How quickly can you get the funds into your bank account? Can you get them on the phone when you need them? Are they good at explaining terminology and answering your questions? Do they provide any resources that help you run your business, such as useful business articles?
• Establish if you can raise finance with them again: If they’re good to work with, you might want to apply for another loan in the future or extend your current loan, so look and see if this is an option.

Find finance: SmallBusiness.co.uk is working in partnership with Finpoint to help you find the best finance deals. If you’re looking for fast funding for your business, complete this quick application to access the UK’s largest panel of business lenders.

#3 – Determine your eligibility

Now you’ve identified some potential lenders, you need to determine whether you meet their criteria, and how likely you will be to be approved. As with any loan, there are certain requirements you will need to satisfy lenders, and often this will vary depending on the amount you are applying for, and the loan provider.

While each lender is different and there is no “set standard” there are a number of factors they are likely to consider, which you should always bear in mind before you consider taking out a loan, these include:

• Your credit score and repayment history
• Trading history
• Affordability
• Business turnover and profitability
• Business assets and security

Top Tip: Any business owner can easily check their credit score online but be aware that it can vary slightly depending on which website you use. Some of the best-known sites are Experian, CreditSafe or Equifax

Some lenders will offer you a “soft search” approval that will give you a good indication of whether you will be approved for a loan, without impacting your credit score. As an example, to be eligible for a Capify Small Business Loan, you’ll need to:

• Be a UK limited company or limited partnership
• Process more than £10,000 a month through your business bank account
• Have at least 12 months’ trading records

#4 – Have all your paperwork ready

Before you apply for your loan, it’s a good idea to make sure you have all the required documentation and paperwork to hand. Any mistakes or missing information may delay your loan application.

Traditional lenders, including most banks, will often have stricter requirements, while alternative lenders such as Capify are generally more flexible and applications can often be completed online in a matter of minutes.

You can always check with the lender beforehand, but as a rule, they could ask for the following information:

• Personal details such as names and address of your business
• Photo ID
• Business plan
• Business and personal tax returns
• Business and personal bank statements
• Business financial statements
• Business legal documents (e.g., articles of incorporation, commercial lease, franchise agreement, etc.)

#5 – Understand the terms of the proposed loan

Once you’ve been approved for a loan, the lender will send you the final terms of the proposed loan. If you have applied for more than one business loan, now is the time to compare and decide which is going to be best for your business.

It’s important that the terms make sense for your business, and so make sure you take a close look at, the length of the loan, the frequency of payment and total amount repayable for each. Before you accept the loan terms, you should consider the following:

• How quickly can I get the cash?
• Frequency of repayments
• What’s the total amount repayable?
• Are the rates fixed or variable?
• Are there any additional fees to consider? (e.g., underwriting fees)
• Are there any limitations on the loan?
• Does the loan require any security?
• Can you repay the loan early? If so, are there additional costs for doing this?
• What happens if you are late or miss a repayment?

Once you’re happy with the terms and confident that it’s the right loan for you, it’s time to accept the offer. Some alternative lenders can have the cash in your bank account in a matter of days, or quicker, but remember to check this with your lender.

Further resources

Best small business loans in the UK – Demystifying the process and showing you some of the best small business loans around.

Fast business funding and loans – For small businesses in need an immediate cash injection, short-term loans can offer a ready-made solutions. Here we explore the ins and outs of this kind of SME finance as well as provide a list of some of the main UK providers.

Getting small business loans with bad credit – Where can you turn to if your company has a poor credit profile?

List of UK peer-to-peer lending companies – Updated quarterly.

Responsible Finance – The membership body of the Community Development Finance Association. It also has a list of ‘responsible lenders’ which you can access here: Finding Finance.

The post How to get a business loan in 5 steps appeared first on Small Business UK.

Sometimes a business does not have enough cash in the bank for day-to-day operations. This could be because your business is highly seasonal, doing most of its business in the run-up to Christmas, or maybe it’s a summer business such as a garden centre.

In the meantime, you still need to cover payroll, rent and any debt payments during the rest of the year.

In short, a working capital loan is simply money borrowed by your company to finance daily operations.

The benefits of invoice finance – Digital technology and open banking are evolving invoice financing, explains Hector Macandrew. Digital entrants are disrupting the market, driving down costs

What is a working capital loan?

In one sense, a working capital loan has always been around – it’s a business overdraft. However, arranging an overdraft with a high street bank has become increasingly fraught and we have seen the rise of independent lenders.

A working capital loan should not be used to buy long-term assets, such as equipment, but instead cover your short-term operational needs. As such, it’s a loan which is taken out to finance your company’s day-to-day operations.

There are two types of loan:

Unsecured working capital loan

These are offered without any assets to lend against, such as stock or a commercial freehold, to act as security but will then have a higher interest rate. A lender will base its decision on the strength of your turnover, history, and credit rating.

Unsecured funding carries more risk for the lender so interest rates are usually higher, and the total amount you will be able to borrow will probably be less compared to secured finance.

However, unsecrured working capital loans have become extremely rare and are only offered by high street banks.

Secured working capital loan

A secured working capital loan will require assets on your balance sheet to use as security, so the amount you can borrow is restricted by the assets available.

Working capital loans are becoming increasingly popular as small businesses weather shooting energy costs and the rising cost of trade because of Brexit.

What documents do you need when applying for a business loan? – Different lenders require different business loan documents. Get prepared with this business loan checklist

How much can I borrow?

You can borrow up to £250,000 and loans can be taken out for anything between three months and three years. However, repayment terms for this type of facility tend to be around 12-24 months.

Where can I find a working capital loan?

In the first instance, try going through a specialist small business finance broker such as Finpoint who will help you compare offers and eligibility.

Popular working capital loan providers include:

• Credit4
• Iwoca
• Funding Circle
• Momenta Finance

How long does it take for a loan to be approved?

Working capital can be a quick way to access finance, as a business often receives the money within 48 hours of an application.

Banks providing traditional bank loans can sometimes quickly approve an application, although they usually require more paperwork than methods such as invoice finance – borrowing against unsettled invoices – and merchant cash advances – borrowing against percentages of daily takings.

How much does a working capital loan cost?

Be prepared to pay high interest rates, with an annual APR of around 40 per cent, which is why small business owners want to pay them off as quickly as possible.

On the other hand, they can be more cost effective in the short term, as they offer the flexibility for you to borrow as-and-when, as opposed to paying for a large capital facility which remains mostly untouched.

Is a working capital loan long-term debt?

No, this is short-term debt and used to cover day-to-day cashflow to pay rent, run your payroll and pay for unexpected stock.

Risks of a working capital loan

Working capital loans are often tied to you, the business owner’s personal credit, so missed payments or defaults may hurt your credit score.

More on business loans

Business loans for starting up abroad – Here is brief overview on getting finance for an overseas business in the UK – can you do it and what do you need to know?

The post What is a working capital loan for your business? appeared first on Small Business UK.

Applying for a loan may seem daunting once you’ve decided to borrow finance. That’s why it’s always important to have the right business documents prepared before you do so.

Documentation varies depending on what type of lender you’re looking to borrow from. With a business loan from a bank, you’re likely to be required to provide more documents to limit risks, such as a business plan or insurance. Other lenders might require less.

Brokers who act as an intermediary between the applicant and the lender offer an online application that further reduces the amount of documentation needed.

Best UK small business accounting software – review guide – It’s never been easier or more affordable to manage your tax and accounting using small business accounting software – find the best accounting package for your needs here

Business bank statements

Business bank statements are an essential document used to verify the income and the outgoings of your company. The statements usually consist of a summary of your transactions which helps determine your spending and income and are typically produced every month.

Financial accounts

Financial accounts are necessary for the lender to gain a clear insight into the company for the full financial year. They allow lenders to see a greater picture of the company, rather than working solely from bank statements alone.

For example, six months’ worth of bank statements might be taken from a period where your business had a quiet trading period. Financial accounts allow the lender to gain a longer-term insight, which shows a truer representation of your business. Turnover, profitability (in the form of profit and loss), and a balance sheet are all contained in financial accounts, which will show your assets, liabilities and equity attached to your business.

Furthermore, financial accounts will also include your company registration number (CRN) and the registered address of your business, should you need to submit these.

Financial accounts for a private company are usually first filed 21 months after the business has been registered with Companies House.

VAT returns

VAT returns, which are usually updated every three months, can be used if your financial accounts are out of date. These returns will show the lender a picture during that year and can be used as an alternative to management accounts. Some businesses though may be VAT exempt.

The difference between secured and unsecured business loans – Adam Parker explains the difference between loan types to help you decide which one is best for your small business

Management accounts

Management accounts are used to display an up-to-date impression of how the business is operating in account form. They’re useful for a lender to determine what will be on the next set of accounts. Management accounts normally include the profit and loss of the business and a balance sheet, but there are usually no set rules.

Accountancy software, such as Sage or Xero, can help you create and produce the financial reports you need when applying for a business loan.

Details of company directors and financiers

The majority of lenders will require an application which is filled out by yourself or a broker. This is where the company director/s, shareholders and other financiers’ information will be detailed.

Proof of ID and address

Proof of ID can be provided in the form of a driving licence or a passport. Proof of address can be provided in the form of a utility bill or personal bank account statement.

Proof of ID and address are used to help guard against the possibility of fraudulent activity and money laundering. Essentially it is to authenticate that you are the person you say you are, as well passing any other criteria such as being over 18.

Speak to your broker

If you are considering a business loan and are still unclear on what documents you need, speak to your broker. They are usually more than happy to help and further explain what documents are needed, as well as answering any other queries you might raise.

Adam Parker is commercial director of credit broker SME Loans.

More on business loans

Best small business loans in the UK – We explore whether a loan is the right finance option for you along with some of the best small business loans in the UK market

Looking for finance? SmallBusiness.co.uk is working in partnership with trusted lenders to find the best business funding deals. Find out more here.

The post What documents do you need when applying for a business loan? appeared first on Small Business UK.

You could be looking to start a business overseas for a number of reasons. You may want to reach a new market or lower your costs, for example.

Now, there is no reason in principle you cannot finance the purchase of an overseas business in the UK. The Business Banking Code says that before a bank lends you any money, they will assess whether they feel that you will be able to repay it. This will probably entail undertaking an assessment which may include the following:

• Information you give them, including information to prove your identity and why you want to borrow the money
• Your business plan and accounts
• Your business’ cash flow, profitability and existing financial commitments
• Any personal financial commitments which may affect the business
• How you have handled your finances in the past
• Information the bank gets from credit reference agencies
• Credit-assessment techniques, such as credit scoring
• Any security provided
• What ongoing information the bank expects you to provide to support the financing.

In the case of starting up abroad the issue of the security you offer for the loan will probably be critical. “If you’re borrowing to build or expand your operations in another country, your bank will likely demand security that is located and accessible to them in your home territory,” Kevin Pratt, small business expert at Forbes Advisor, told Small Business. He said that if you’re looking to borrow to establish premises in France, for example, you might be asked to put up your home in the UK as a secure asset for the bank to possess should you default on the loan.

The bank will also want to know the local circumstances of the overseas business and whether local financing might be available. They will also seek information on how you intend managing and controlling the business if you are not based in the country where the business is located.

“You’ll also face greater scrutiny from the bank with regards to your understanding of local rules and regulations in your destination location – both in general commerce terms, such as employment law and the local tax regime, and with regard to your own area of operation, in terms of compliance and corporate responsibilities,” said Pratt. “In other words, you’ll need to do your homework before applying for a loan, and you’ll need plenty of evidence that you grasp what’s involved.”

Be aware that with a higher risk comes greater costs. “Any bank will consider this sort of funding to be higher risk than a standard loan. And for banks, the higher risk always equates to a higher rate of interest, so be prepared to pay more.

“If you’re a start-up, you should also consider sources of government funding, such as the British Business Bank,” he added. If you so choose to go down this route, Pratt warned that you may be offered what is in effect a personal loan rather than a business loan, and will need to pass rigorous credit checks as an individual, as well as demonstrate the viability of your proposal.

Find finance: SmallBusiness.co.uk has partnered with three trusted lenders to help you find the best financing deals. If you’re looking for fast funding for your business, complete this quick application.

The alternative to a loan would be to seek to interest an individual or UK business to invest equity (risk capital) in the business in return for a share of the profits. You would be more likely to secure such an investment through organisations linked to that country such as through Chambers of Commerce or the UK Embassy of the country concerned.

Read more

Getting small business loans with bad credit – Even a small business owner with bad credit may need to borrow unexpectedly for stock or a sudden car repair. Where can you turn to for a small business loan with bad credit?

A guide to getting a small business loan – Everything you need to know on what small business loans are and what types of loan are available for your business

Borrowing money to pay for stock: inventory finance, credit cards, loans and more – We explore the options that are available to help you cover the costs of your stock as well as the pros and cons

The post Business loans for starting up abroad appeared first on Small Business UK.

At some point, all of us may need to apply for a business loan to buy unexpected stock, a car repair, pay for training, or some other unbudgeted expense. People with a bad credit history often face dire consequences financially, especially when they apply for a loan and get turned down by a high street bank. However, for some small business owners, bad credit loans can be a solution.

Having bad credit means your credit history is viewed negatively by companies. If your score is low, it could be because of:

• Late payments
• Defaults
• County Court Judgements
• Bankruptcy
• Too many previous loan applications (known as “hard searches”)

The situation becomes even worse when you have to pay higher interest rates and have very few options left for debt repayment.

Bad credit loans are designed for such people who might be responsible citizens but somehow, they have a low credit score because of a missed payment.

Companies do not advertise “bad credit loans”- this is just a common, unofficial name for them.

Five top tips for those seeking a business loan – In need of some cash? We take a look at what small companies need to bear in mind before pursuing a business loan

What are bad credit loans?

A bad credit loan works just like any other loan – you borrow a certain amount and pay that back in set monthly instalments (which include the loan balance and interest). You can use your loan for almost any purpose, including an emergency, premises improvements or debt consolidation.

Bad credit loans are divided into two main types:

• Secured bad credit loans
• Unsecured bad credit loans

Both these types have their own pros and cons but usually most people prefer a secured bad credit loan.

Secured bad credit loan

A secured loan requires some sort of an asset to be used, usually your home, against the loan amount in order to secure it. This is due to the poor credit history of the borrower since there is risk involved in these types of loans and the lender needs a way to make sure the person would be able to return the loan along with interest.

Logbook loan

One type of a secured loan is known as logbook loan, which takes your car as security. It is possible to borrow up to £50,000 using this approach, even if you have a poor credit score. Some companies offer same-day loans by offering this type of bad credit loan to borrowers. These companies can be approached online, and the procedure is as simple as filling out a form. Usually there are three steps involved in this process: apply online, speak to a lender, and receive money in your bank account.

However, be warned – logbook loan interest rates can be as high as nearly 450 per cent over an 18-month repayment period, meaning that if you borrow £700, you would end up repaying £1,260.

Unsecured bad credit loan

The other type of a bad credit loan is known as unsecured loan. In this type, no equity is required to secure a loan, but the borrower usually has to pay much higher interest rates.

There are many subcategories of these loans, including business loans, car insurance, and debt consolidation.

Again, there are online firms which offer unsecured loans by cooperating with a number of lenders who are willing to provide short-term loans to people with a poor credit history. These online companies offer safe and secure ways of getting a loan when all other options fail. The process is easy and straightforward, there are no documents required, the approval time is usually 24 hours to 3-5 business days. Moreover, you get funds instantly in your bank account through electronic money transfer.

Business loans for starting up abroad – There is no reason in principle you cannot finance the purchase of an overseas business in the UK

Payday loan

Frowned on given the bad publicity and extortionate rates charged to come borrowers, payday loans are also unsecured and must be paid back in full along with interest within a fortnight. Payday loans are for smaller amounts, usually between £100 and £1,000. Typically, you will agree that the payday loan company can take its payment from your debit card on the day your salary hits your bank account.

Improving your credit score

Ironically, it is only through taking out a loan and repaying it on time that you can rebuild your credit score. These credit-builder loans can repair the damage done if you have a less-than-perfect credit score.

Credit builder loan

Credit builder, or credit repair, loans are designed to help those with a bad credit score, or a limited credit history improve their score. By making all the repayments on a credit builder loan, you demonstrate that you can manage your finances and repay a loan in full.

These loans aim to help you rebuild your credit score, so if you need to borrow money in the future you can hopefully access more affordable rates.

Credit builder loans typically only offer a relatively small sum of money, anywhere from less than £100 to £5,000 or sometimes more, with repayment terms ranging from six months to several years.

But these loans can be very different to standard personal loans. Some lenders will “lock away” the money and only give you the money once you have made all the necessary repayments. And the lender takes a one-off fee for transferring your money back to you.

Credit builder credit card

Credit builder cards are a type of credit card that can be used to improve your credit score. When you use a credit builder card, you’ll do exactly that: build (or rebuild) your reputation with lenders and credit reference agencies – increasing your chances of successfully applying for loans, better credit cards (and eventually, large credit products such as mortgages).

If used properly, a credit builder credit card can improve your credit score within four to six months.

Credit builder cards usually have a much lower credit limit (meaning you can spend less on them) than standard credit cards, and you’ll have to pay higher interest rates if you don’t repay on time.

More on business loans

What documents do you need when applying for a business loan? – Various lenders require different business loan documents. Adam Parker ticks off his business loan checklist

The post Getting small business loans with bad credit appeared first on Small Business UK.

If you run a small business, the chances are you’re going to need a loan at some point. Maybe you already have, like a commercial mortgage for your first space, or the money you borrowed from family and friends to get your business off the ground. Perhaps you’ve been able to cover your costs up to now, but you suddenly need some extra cash to replace a piece of equipment or pay for an unexpected bill.

Whatever you need funding for, borrowing can be daunting when you’re new to it. The world of business finance is constantly evolving, as new schemes, providers and lending products emerge. That’s why we’ve put together this guide, to help you understand what small business loans are all about and how to get one.

What is a small business loan?

It may seem obvious, but the main thing that distinguishes business loans from personal loans is that they’re used for commercial activities. If you don’t want to impact cash flow or dig too deep into your cash reserves, the right funding could help you cover a financial gap or buy something big without spending a lot up front.

Just as you’d pay off a house with a mortgage, a business loan can allow you to access something just beyond your reach, by borrowing money that you pay back over time with interest.

What’s the difference between a secured loan and an unsecured loan?

When people talk about assets they’re usually talking about things like stock, machinery, vehicles and commercial property. But if you run one of the UK’s five million small businesses, it’s likely that your company will have fewer assets than a large or mid-sized one. This lack of assets can make it harder to take out a large loan, but there’s still scope to get something more short-term.

Lenders see assets as security, which they can use to ensure they’ll get their money back if you can’t pay back a loan.That’s why loans which aren’t secured against something valuable are called unsecured loans and are riskier for lenders to take on.

Secured loans, on the other hand, tend to be used for borrowing more substantial sums of money, since they give lenders a guarantee that they’ll be able to get back the value of the loan if you default. Secured loans have lower interest rates as a result.

What do small businesses use loans for?

Small business owners use loans for all types of things, from buying property to plugging short-term cash flow gaps. It all depends on your company’s financial situation and what you’re trying to achieve. Here’s a few examples:

1. A seasonal business looking to cover working capital

Let’s say you run a seasonal business, like a ski equipment shop, that performs well during winter but sells a lot less during the summer months. If your financials make a strong enough case for your company’s high sales during peak periods, you could take out a working capital loan to help pay for everyday costs.

This type of finance could take the pressure off wages, rent and utilities, which tend to remain constant even when your business is earning less.

2. A manufacturing firm looking to invest in new equipment

Let’s imagine your business makes aircraft parts and you’ve just signed a contract with a client looking to make a big order. With asset finance, you could ramp up production by either hiring a new piece of machinery or spreading the cost of an item that you eventually own outright.

Either way, by taking out a business loan to fulfil your new client’s order, you’ll also be able to enhance your company’s capacity and earn more money, without a big outlay. The interest on the loan may cost your business money, but it’ll also make your operation more effective and put it in a better position to grow in the long-term.

3. A recruitment agency looking to unlock the cash in its invoices

Let’s say you run a recruitment firm, where a lot of your clients take a long time to pay your invoices. Your business might be performing well on paper, but the outstanding payments your business is owed can make it difficult to cover other costs like VAT, stock purchases and payroll.

With invoice finance, you could unlock cash more quickly, by selling those unpaid invoices to a lender and releasing almost all of the cash they represent, rather than waiting months. Once your client eventually pays what they owe, you can pay back the lender.

How does a small business loan work?

From a lender’s point of view, the most important thing about a business loan is finding proof that you’ll be able to pay it back. If the lender has that assurance – by looking at your financials and the things you own, for example – then they’ll approve your application and eventually deposit the funding you’ve asked for into your account.

After that, it’s your responsibility to repay the loan, often in monthly instalments and with the interest on top. The rate of interest may depend on your business’s financial circumstances and will vary between different lenders, based on things like your business’s creditworthiness and the lender’s appetite for risk more broadly.

How do you apply for a small business loan?

When you’re ready to take out a loan, the first thing you need to do is figure out what type of funding you need. If you’re looking to invest in something more long-term like an asset or a property, then you’re probably in the market for asset finance, a commercial mortgage or a traditional business loan. If you need something more flexible, with a predetermined limit where you can withdraw money as and when you require it, then you might benefit from a revolving credit agreement.

Whatever you need the money for, lenders will want to know how much you’d like to borrow and over how long. Once you apply, they’ll ask to see your accounts too – sometimes up to three years of them – so they can understand how much money you’re making. It’s also worth noting that many lenders only deal with businesses that have been trading for a certain number of years and are turning over a certain amount.

As always, lenders want to establish if you’re creditworthy, so they’ll look at your profits too, to ensure you can afford to repay a loan alongside your existing expenses. They’ll also want to understand the amount of debt you have already and the things you own, which could potentially be used as security. 

Taking out a loan as a small business owner doesn’t have to be difficult. And even though there’s an enormous amount of lenders out there, they each have their own specialties, which can work in your favour.

Next steps

SmallBusiness.co.uk is working in partnership with trusted lenders to help you find the best finance deals.

If you’re looking for fast funding for your business, complete this quick application to access our panel of business lenders.

Read more

What are the funding options for hospitality businesses?

6 types of business funding for UK tech companies

The post A guide to getting a small business loan appeared first on Small Business UK.

The Recovery Loan Scheme, which offers a government guarantee for small business lending, has been extended for another two years.

Government will underwrite 70 per cent of what the lender could lose in the event of default.

The maximum loan size remains at up to £2m.

>See also: £6bn business loan package arrives this week

However lenders may now require a personal guarantee from the borrower. This means you could lose your home if you don’t keep up repayments.

The Recovery Loan Scheme was originally launched in April 2021 to help businesses recovering from the Covid-19 pandemic. It has supported almost 19,000 businesses with an average of £202,000 in support.

Business secretary Kwasi Kwarteng said: “Small businesses are the lifeblood of the British economy, which is why we are determined to support our traders and entrepreneurs in dealing with worldwide inflationary pressures.

>See also: Government to launch £3bn recovery loan scheme

“The extension of the Recovery Loan Scheme will help ensure we continue to provide much-needed finance to thousands of small businesses across the country, while stimulating local communities, creating jobs and driving economic growth in the UK.”

However, MHA head of banking and finance Gregory Taylor branded the new Recovery Loan Scheme a “failure” and the extension did not go far enough to helping SMEs. Furthermore, requiring a personal guarantee from the borrower de-risks the government’s own 70 per cent guarantee and puts the risk back on business owners.

David Fleming, UK head of restructuring at insolvency practitioner Kroll pointed out the low take-up of the previous RLS due to its restrictive terms.

Furthermore, said Fleming, given the scrutiny over how much is owed in Covid loan repayments, it may be more challenging for banks to extend further loans where the customers are outside of normal banking terms.

The increased interest rates and need for personal guarantees may result in a lacklustre take up for the new Recovery Loan Scheme, he warned.

How the new Recovery Loan Scheme works

Up to £2m is available per business. The minimum funding is £1,000 for asset and invoice finance and £25,001 for term loans and overdrafts. The total amount offered is at the discretion of the participating lender. They will carry out credit checks and fraud checks before granting you the finance.

The government is guaranteeing 70 per cent of the finance to the lender and the borrower will always be 100 per cent liable for the debt. The annual interest rate and upfront and other fees cannot be more than 14.99 per cent.

Who are the new Recovery Loan Scheme lenders?

The British Business Bank (BBB) has outlined the accredited lenders under the new iteration of the RLS:

Term loans

• Bank of Scotland
• Coventry & Warwickshire Reinvestment Trust
• Lloyds Bank
• Natwest
• RBS

Invoice Finance

• HSBC UK
• Skipton Business Finance

Asset Finance

• Aldermore
• Paragon

Revolving credit (overdrafts)

• Arbuthnot Latham
• Ebury

How do I apply?

You can apply directly through your lender. Check the links above for more details.

How long is the term?

The length depends on what kind of finance you’re applying for.

• Up to three years for overdrafts and invoice financing facilities
• Up to six years for loans and asset finance facilities

Further reading

Lending to small businesses hits all-time low

The post How the new Recovery Loan Scheme works appeared first on Small Business UK.

The Treasury is set to announce its £6bn successor to the Recovery Loan Scheme this week as small business faces a looming recession.

Treasury and the business department are expected to sign off the replacement business loan guarantee scheme, referred to as RLS2 by officials, within days.

The new business loan guarantee scheme will be less generous than the first Recovery Loan Scheme but aims to provide up to £3bn a year of debt over two years.

>See also: Government to launch £3bn recovery loan scheme

Nearly £80m was lent to SMEs through the initial Covid loan schemes but only £1bn was through the Recovery Loan Scheme.

The original Recovery Loan Scheme offered a 70 per cent government guarantee for loans of up to £2m to small and medium-sized firms but ended on June 30, leaving businesses which need to borrow in limbo.

Lending to small businesses is at an all-time low, according to research from the Federation of Small Businesses (FSB), with just 43 per cent of applications approved.

>See also: Lending to small businesses hits all-time low

Fewer small businesses are also applying for finance. Just nine per cent applied in the first quarter of 2022 – the lowest proportion since the FSB started tracking SME lending.

A government source told the Daily Telegraph that RLS2 had been delayed by efforts to toughen up fraud protections following the loss of billions of pounds on Covid support.

12% of Bounce Back Loans in arrears

Only today it was revealed that nearly 200,000 small businesses are in arrears on their Bounce Back Loan repayments, nearly double the official number last reported last September.

Purbeck Personal Guarantee Insurance put in a Freedom of Information request to the British Business Bank, which administered the Bounce Back Loan scheme.

In total 193,377 firms had failed to meet their repayment terms as at 27 June.

That equates to 12 per cent of the 1.6m small businesses that took out a Bounce Back Loan and £5.7bn of outstanding debt.

Of those in arrears, 151,587 are behind by more than 90 days in making repayments, which is normally considered the benchmark for being in serious financial distress. They owe an outstanding £4.5bn.

The government has estimated that £4.9bn of Bounce Back Loans may be lost due to fraud.

Todd Davison, managing director of Purbeck Personal Guarantee Insurance, said: “The ease with which business owners and directors were able to secure Bounce Back Loans, with six years to pay off the debt, no personal guarantees and no fees may have come back to bite the UK government which is now facing the prospect of close to £5.5bn lost to the scheme in arrears, fees and interest.”

However, the British Business Bank told The Times that over 85 per cent of facilities across the three Covid loan schemes – Bounce Back, Coronavirus Business Interruption Loan (CBIL) and the CBILS scheme for larger companies — had either been fully repaid or were meeting monthly payments as scheduled, as of March 2022.

The BBB will publish more up-to-date official repayment figures within the next month.

Further reading

Treasury small business loans could be permanent

Looking for finance? SmallBusiness.co.uk is working in partnership with trusted lenders to find the best business funding deals. Find out more here.

The post £6bn business loan package arrives this week appeared first on Small Business UK.

Debt finance is one of the most popular funding options available to small firms in the UK. Unlike equity finance, which entails giving away a share of your business in return for investment, debt finance involves borrowing money to either start or grow a company.

Not too long ago, the most common forms of debt finance were bank loans, along with loans from friends and family. However, they have been joined by a raft of new debt finance options, the majority of which emerged in the wake of the recession. From challenger banks and online lenders to peer-to-peer (P2P) and invoice finance, these new players have delivered greater choice to businesses and helped bring the debt finance industry into the 21st century.

The benefits of debt finance

One of the main advantages of debt finance is that it allows a business owner to stay in control of their company. While equity finance tends to offer higher amounts of capital, a founder will have to sacrifice a portion of their ownership – or equity – in exchange for the funding. With debt finance, the only cost to a business is the interest charged on a loan, plus additional fees in some cases.

A business owner will usually need to provide a personal guarantee to repay any outstanding debt in the event of company insolvency, and may also have to secure the finance against company or personal assets, such as property or machinery. This is common practice, however, and simply allows lenders to manage the risk of lending. As long as a business repays according to the schedule agreed with their lender, their assets won’t be in any danger.

How can a business use debt finance?

Debt finance can be used for any purpose related to business growth, whether it’s buying new premises, refurbishing existing premises, upgrading machinery to fulfil a lucrative contract or launching a multi-channel marketing campaign. These sorts of projects typically require significant capital investment, but debt finance can help spread the cost over several months or years, easing the financial burden on a company so that it can continue to grow.

With late payments an ever-growing problem for SMEs, debt finance can also help companies maintain a healthy cash flow while they await payment from customers. There are numerous lenders specialising in invoice finance, which allows businesses to borrow money against the value of sales invoices. Such lenders will usually advance a percentage of an invoice’s value – generally around 80 per cent, although some lenders will advance up to 100 per cent – and release the balance once the invoice is paid, minus a fee. Other options for companies seeking a flexible cash flow solution include working capital loans and merchant cash advances, which basically serve as a revolving credit facility.

Seasonal businesses often use debt finance to negotiate the slow months and complete projects that wouldn’t be possible in peak season. For example, if a hotel needs renovation work, it would normally be carried out when occupancy is low. However, with less revenue coming into the business, it might require additional capital to cover the cost. Some lenders offer specialist hotel finance and will even give businesses the option of revenue-based repayments, allowing them to repay less when sales are lower and more when they’re higher. This can be a better option for seasonal businesses than being tied into fixed monthly repayments.

Types of debt finance

Despite the plethora of options available to businesses in today’s debt finance market, they can be grouped into four general categories:

• Family and friends
• Startup Loans
• Bank loans
• Online lenders

Family and friends

Bank loans and other forms of debt finance can be hard to come by for businesses that are yet to launch or have only been trading a matter of months. Most banks and online lenders will need to see evidence of revenue and stable cash flow, ideally over a period of at least six months. That’s why many business owners turn to their friends and family for funding, especially in the early stages.

A key advantage of borrowing from friends and family is that they may be more flexible on repayments and won’t charge any interest on top of the loan. Furthermore, unless a comprehensive agreement is drawn up and signed by both parties, you probably won’t be at risk of losing any assets should you fall behind with payments.

However, there’s no escaping the fact that borrowing from your nearest and dearest puts personal relationships on the line. So, before you seek or accept funding from a friend or family member, it’s worth managing their expectations and reminding them of the risks involved.

Start Up Loans

If you can’t raise funds from friends and family to help start your business, the government might be able to help. The Start Up Loans Company offers personal loans of up to £25,000, which can be used for starting a business or growing a business that’s been trading less than two years. All loans come with a 6 per cent fixed interest rate and are repayable over a term of one to five years. There are no early-repayment or set-up fees. To be eligible for a Start Up Loan, you must be a UK resident, aged 18 years or older, and hold the right to work in the UK.

There aren’t many other debt finance facilities that cater specifically to startups, but your company may be eligible for a small business grant if it delivers an innovative solution in fields such as healthcare or transport. Innovate UK regularly runs funding competitions, while The Prince’s Trust and New Enterprise Allowance offer startup funding to young business owners. Companies in Scotland can also apply for a research and development grant through Scottish Enterprise.

Bank loans

The British Business Bank reports that in 2021 bank lending returned to pre-pandemic levels. Over half of loans (51 per cent) were provided by challenger and specialist banks, up from 31 per cent in 2020. What’s more, 48 per cent of small businesses are looking to apply for some kind of external finance in the coming 12 months.

Bank loans are generally a good option for businesses whose need for finance isn’t particularly urgent. Applying for a bank loan can be a lengthy process, and you might be asked to prepare a comprehensive business plan as part of the application. The lending criteria of banks also tends to be stricter than that of newer ‘alternative’ lenders, meaning it’ll be difficult to secure funding if your credit history is anything but spotless and you’ve been trading for less than two years.

Aside from not knowing about the alternatives, one reason that many businesses seek funding from their bank is the opportunity of a lower interest rate. However, it’s worth bearing in mind that some banks may impose a charge should you decide to pay off a loan before the end of its term. In contrast, many alternative lenders allow businesses to settle their loan early and only pay interest for the time they had the funding. This can make the overall cost of borrowing lower.

Useful link: – Looking for funding? Find the right finance for your business here

Online lenders

The internet has given rise to a host of new lenders that can fund businesses quicker than banks and are more flexible with their lending criteria. While awareness of ‘alternative finance’ remains relatively low, the market is growing rapidly and has already provided a route to funding for thousands of SMEs that have been rejected by their bank or become fed up with waiting for a decision.

>See also: Fast business funding and loans

At one end of the spectrum are the lenders offering a modern spin on the traditional business loan. Not only do these companies provide a lightning-fast application process – with approval and funding in as little as 24 hours – but many will offer top-ups and repayment holidays as a standard feature of their loans, rather than an expensive add-on. In many cases, the money will be lent off a lender’s own balance sheet, allowing them to set their own lending policy. This means they’ll often fund a company that a bank, for example, couldn’t.

The remainder of the alternative finance market is largely occupied by peer-to-peer (P2P) lenders. Instead of lending money off their own balance sheets, P2P platforms match individual investors with numerous businesses that are looking to borrow. While they typically offer a better interest rate to investors than a bank ISA, there’s no guarantee of a return as it depends on every business repaying their loan in full. Businesses can sometimes enjoy lower interest rates when borrowing through a P2P platform, but it can take longer to receive the funds and there’s usually a fee to pay.

Further reading on online lenders

Why it’s time to look online for business funding

Alternative business funding for small businesses

What else should I know about debt finance?

The debt finance industry is becoming increasingly crowded, which means there’s more choice than ever for small businesses. By spending some time exploring the various options on offer, you should be able to find a funding solution that suits the needs of your company.

If you’ve never applied for a business loan, utilising the services of a broker could help remove a lot of the legwork. Bear in mind, however, that anybody can set up online as a broker, so it’s worth doing some due diligence beforehand. To ensure you’re working with an honest and professional broker, check that they’re a member of the National Association of Commercial Finance Brokers (NACFB). This is generally a good sign that they’ll have the interests of your business in mind.

Alternatively, if you’re an early-stage company that can’t afford to pay a broker fee, impartial websites like Better Business Finance will point you in the direction of lenders that can support your desired funding type, amount and purpose. Some of the leading price comparison sites also have a business loans section, and there are a handful of online platforms that work as matchmaking services for SMEs and alternative lenders. One of these platforms, Funding Xchange, doesn’t charge a fee to businesses. It is also one of the designated platforms for the government’s bank referral scheme, which compels banks to refer businesses they’ve rejected to alternative finance providers.

There’s a good chance you’ll be quoted a range of different rates when applying for debt finance. Whereas some lenders will give you a monthly interest rate, which is the most common way to display the cost of a loan, others might present the price of their funding using less conventional rates such as factor rate or yield. Using a rate comparison tool, you can easily compare quotes that are based on different rates, and make sure you’re getting the best deal for your business.

Adam Pescod is content manager at Fleximize.

Further reading on debt finance for small business

• A brief history of online debt finance

The post An introduction to debt finance for small business operators appeared first on Small Business UK.

Banks refused to lend to one third of British small businesses who applied for a loan last year.

That means nearly one million businesses faced pushback from banks, according to research by open banking provider Yolt, with the main sticking points being timing, too much debt and insufficient collateral.

Collectively, UK businesses missed out on £3.6bn worth of much-needed finance and of those businesses which did secure funding, only 20 per cent said the process was easy.

>See also: Small business finance – the complete guide

Research found the average SME sought to borrow £331,275 to help grow their business, mainly for equipment, technology and business development. However, on average, small businesses managed to borrow approximately £50,000 less than this.

In May, the FSB said that lending to small businesses hit an all-time low, with fewer small firms now applying for finance. Just nine per cent applied in the first quarter of 2022 – the lowest proportion since records began.

Small Business Pro will help with the heavy lifting of managing customers, taking payments, insurance, finance and HR, plus you’ll get a host of personal wellbeing benefits.

You can find out more about Small Business Pro here.

With a helpful boost from your bank by no means a given, what are the alternative business funding options to consider for your small business? Where can you turn to for business funding if you need an alternative?

>See also: Small business startup funding

Alternative business funding options

Invoice financing

For businesses that regularly sell to other businesses on credit terms, invoice financing could be a helpful avenue to help ease cashflow. With this alternative funding method, a lender pays you quickly – most of the time within 24 hours – for your unpaid invoices and takes a cut when the payment finally does land.

This can help accelerate business growth. However you’re banking (literally) on those clients to pay up eventually.

It is also worth noting this option is only available to B2B services, so your customers have to be other businesses and not the public.

There are two types of invoice finance. Invoice factoring, where the finance provider provides up to 90 per cent of the outstanding invoice and chases up payment from your customers directly, and invoice discounting, whereby the provider still provides a percentage of the invoice but the customer pays the business as normal.

>See also: The benefits of invoice finance

Invoice finance providers

Alternative loan and debt providers

For small businesses, business loans can be a useful boost to buy stock, equipment or assets. The monthly repayment period can span from between one to 10 years and a fixed rate can be rubber-stamped before the loan is taken out.

There are two types of business loan.

>See also: Fast business funding and loans

Secured business loans require you to put up collateral as security, meaning the lender will take over the assets if you’re unable to repay. That could mean your house or your car. The advantage of this route is interest rates are low.

Unsecured loans are easier to obtain, and don’t require the risk of losing any assets but you can expect to pay more in interest.

With banks being increasingly cautious with their loans, alternative loan providers have seen a surge in popularity, with most giving approval within 24 hours.

>See also: Best small business loans in the UK

Loan and debt providers

Merchant cash advance

If your business takes card payments with a card terminal, it is possible to get that cash quicker using merchant cash advance.

Unlike a traditional bank loan, there are no interest rates or fixed monthly payments. Instead, you pay the provider a percentage of future card revenue. If your business takes in less cash one month, this is reflected in the repayment and you pay less. If the business has an above-average month, be prepared to fork out a bit more.   

This option is a fast way of landing funding. The time it takes between a customer buying a product and that money becoming available in your bank on average in the UK is three business days with a payment processor. By using merchant cash advance, that cash could be available within 24 hours.

>See also: Is your business a good candidate for merchant cash advances?

Merchant cash advance providers

Peer-to-peer lending

Peer to peer lending, commonly known as P2P lending, allows borrowers to be matched with individual lenders for quick and flexible loans at competitive rates via a P2P platform. 

Once the borrower discloses the amount they’re looking to borrow and desired repayment period, the platform will do the background work, such as checking credit scores, before matching a borrower with a lender.

An advantage of going down the P2P route is a decision on whether you can be granted funding can be made almost instantly, with the loan becoming available in a matter of days.

See also: Peer to peer lending: A small business guide

Peer to peer lending providers

Further reading

Raising start-up capital – who to turn to? – Being a founder can be a lonely business, especially when raising money for your start-up. Don’t worry, help is at hand. These advisors will either invest, help you crowdfund or put you in the best possible place for seed funding

Looking for finance? SmallBusiness.co.uk is working in partnership with trusted lenders to find the best business funding deals. Find out more here.

The post Alternative business funding for small businesses appeared first on Small Business UK.

Cash flow is an ongoing concern for small businesses, who often have to deal with reluctant lenders and mountains of paperwork. Which is why more and more are turning to fast funding and loans.

As to why small businesses are being turned down for loans, 31 per cent said it was because their business was too young, too-high levels of existing debt (22 per cent) and insufficient collateral (20 per cent). The research, from Yolt, also revealed that only one in five businesses felt the borrowing process was easy.

However, there may be a fast business funding option that is better for you, which we’ll be exploring in this article.

>See also: Small business finance – the complete guide

What type(s) of funding can I get?

Les Roberts, content manager at Bionic, said: “Typically, a business loan can range from as little as £1,000 up to several million. Repayment terms can vary from one month to 15 years, depending on the type of loan and the lender. Business loan rates in the UK will also vary, depending on a number of factors – from the length and size of the loan to your business’ financial position.”

With this kind of funding, you’re generally looking at secured loans (which requires something that you own as collateral), unsecured loans (a loan which doesn’t involve any kind of collateral) and merchant cash advances (where you repay your loan as a percentage of future sales).

What can I use funding for?

Each provider may have stipulations, but you can really use your loan for anything. This could include:

• Improving cash flow
• Buying equipment/stock
• Take advantage of a one-off buying opportunity
• Clear debt
• Pay suppliers

The British Business Bank said that the main reason SMEs is to support their business working capital or cash flow.

“Fast finance is generally better used when you need to raise funds quickly, such as to bridge a short-term cash flow issues, or to take advantage of an opportunity that might have arisen, such as buying some stock in bulk at a discount,” said Stuart Airey, head of corporate finance at Accounts and Legal. “It’s not totally suited to longer-term borrowing, although can be used that way if other options aren’t available.”

>See also: Alternative business funding for small businesses

What happens if I can’t repay my loan?

If you can’t repay, then fees will likely be added and/or the interest rate will be increased.

Will I need a business bank account?

If you’re a sole trader, you may be able to get away with a personal bank account but otherwise you’ll need a business bank account. This can also depend on your credit score. In general, you’re better off having a business bank account, even if you’re a sole trader. Read more at 5 benefits of using a business bank account over a personal account.

>See also: Small business startup funding

Risks of fast business funding

As mentioned before, proving your viability as a business can prove restrictive. “The biggest struggle is actually being able to borrow money,” said Airey. “Unless you’ve got a couple of years profitable trading history and are willing to offer a personal guarantee, a lot of lenders won’t consider them an investible business. This makes it really difficult for brand new businesses to secure any financing.”  

CEO and founder of Unbiased, Karen Barrett, told Small Business: “For small businesses in need an immediate cash injection, short-term loans can offer a ready-made solution – applications are processed much faster than traditional loans, often accepted within 24 hours. But be warned. The less stringent underwriting process means they often attract higher interest rates, as well as heavy penalties for those who fail to repay on time. For this reason, it would be wise to seek professional advice before signing on the bottom line.”

You can mitigate this by asking the right questions. Airey said that you should be asking:

• What other options are available?
• Whether trying to raise equity funding might be a better option

He added that businesses need to be asking themselves how they’re going to repay the finance and ensure they consider the future cash flows of the business will be sufficient to meet future repayments.

“Often small businesses don’t shop around when it comes to finance, and the majority take the first offer they receive, which might not be the best product available to them,” said Airey. “Fast funding is generally easier to apply for, but applying with multiple lenders can take time, as their document requests can vary.”

One concern you might have is protecting your credit score. Most firms will run with a soft credit check, so it won’t affect your credit rating. Be sure to check before you apply, though.

The best fast funding providers in the UK

As Airey says, finding the right provider can make a real difference, so here are a few UK-based providers to kick off your search. Note that most of them will have some kind of eligibility criteria in terms of how long you’ve been trading and/or your minimum turnover.

Cashsolv

Loan limit: £20,000-£250,000

Repayment term: 1-12 months

Type of finance: Unsecured loans

Time taken for approval: Money will reach your bank within 24 hours

Can I repay early? No

Cashsolv instant loans are specifically designed for emergencies but there’s no guidance outlining how you should spend it.

You have the option of either repaying in one lump sum at the end of the loan term or to repay in monthly instalments.

Cashsolv asks for “reasonably up-to-date” accounts before they give you a loan. You’ll also have to be able to declare how you intend to make repayments along with supporting documents. Cashsolv will be doing ID checks to keep itself in-line with money laundering regulations and you’ll be required to provide a proof of address.

As this is a short-term loan, early repayments won’t be accepted.   

Century Business Finance

Loan limit: £5,000 – £250,000

Repayment term: Six – 60 months

Type of finance: Secured and unsecured loans

Time taken for approval: Same-day approval

Can I repay early? Yes, on loans from £10,000

Century Business Finance promises a two-minute application process and low rates.

There are a few different financing options available: cashflow loans, unsecured business loans, same day business loans, VAT & tax business loans and fast business loans. Once approved, the money will be in your bank account the same day. Note that a financial services intermediary fee will be taken out of your account within seven days of receiving the funding.  

You must have been trading for at least six months and a turnover of £72,000 per year.

Century Business Finance will allow you to repay early on loans from £10,000.

Iwoca

Loan limit: £1,000-£750,000

Repayment term: From one day to five years

Type of finance: Unsecured

Time taken for approval: Within one working day

Can I repay early? Yes

Iwoca can give loans to all businesses, no matter the age or sector. It’s open to sole traders, partnerships and limited companies. It also has a two-minute eligibility check – and the whole application process takes five minutes.

Accounts come with an account manager.

If you go for a flexi-loan (repayment up to 24 months) then there are no extra fees and charges. If you go for a business loan, there will be a 6 per cent funding charge spread out over the first few repayments.

You’ll need bank statements from the past year in order to apply (or you can link your account via Open Banking). The other documents required will vary based on the type and size of loan, but could include VAT returns or company accounts.   

Loan rates start at 2 per cent and there are no fees for repaying early.

With the flexi-loan option, you can apply for a top-up once you’ve paid back a third of your original credit limit. Updated information about your business will be required at the time of topping up.   

Capify

Loan limit: £5,000 to £500,000

Repayment term: Repay weekly

Type of finance: Secured business loans and merchant cash advance

Time taken for approval: Receive your provisional decision within 60 seconds

Can I repay early? Yes

Capify will take a small percentage from your business bank account each day rather than a lump sum.

Merchants will typically receive up to 130 per cent of monthly their gross sales. You must have been in business for at least 12 months with minimum gross sales of £10,000 a month and no open bankruptcies.

To apply, you must have six months’ worth of bank statements, copy of void check and photo ID.

For the merchant cash advance you need to take at least £6,000 a month in card payments and have six months of trading history.

Your application will need to be filled out by 51 per cent or more of your business ownership, you also need four months recent credit/debit card processing statements and your most recent monthly bank statement.

365 Business Finance

Loan limit: £10,000 – £300,000

Repayment term: Dependent on debit and credit card payments

Type of finance: Merchant cash advance

Time taken for approval: Within 24 hours

Can I repay early? N/A

365 Business Finance has no fixed monthly payments. Instead, you pay back a percentage of your debit and credit card sales. This means that when your sales are up, you’ll be able to pay more of your loan balance and when sales are low, you pay less.

To be eligible, you must have been trading for at least 12 months and have an average monthly credit and debit card turnover of £10,000.

Love Finance

Loan limit: £5,000 – £500,000

Repayment term: Up to five years

Type of finance: Unsecured loan

Time taken for approval: Minimum four hours

Can I repay early? Yes

Love Finance offers a completely automated service with interest rates as low as 2.9 per cent. Funds in as little as four hours. However, you can speak to someone on the phone if there is an issue.

Must have been trading for a minimum of three months and have a £35,000 minimum annual turnover.

You can repay early without penalty.

Merchant Money

Loan limit: Up to 500,000. Regulated business loans for sole traders up to £25,000.

Repayment term: Six months to five years

Type of finance: Unsecured loans, merchant cash advance

Time taken for approval: 24-hour approval

Can I repay early? Yes

Merchant Money is a member of the Federation of Small Business (FSB) and a patron of the National Association of Commercial Finance Brokers (NACFB).

You have the choice of financing through a loan or through a merchant cash advance. To apply, you must ensure that your current debt obligations are “affordable”. You must have a minimum of one year’s accounts or six months trading time with a card terminal for a cash advance. You’ll have a  minimum annual turnover of £100,000, or £5,000 per month for a cash advance.

Fleximize

Loan Limit: £5,000-£500,000

Repayment term: 12-48 months on Flexiloan; 3-12 months on Flexiloan Lite

Type of finance: Unsecured or secured loans

Time taken for approval: Within 24 hours

Can I repay early? Yes

Fleximize offers both secured and unsecured lending options for both of its loans.

Flexiloan is available for businesses that have been trading for 12+ months. It’s good for those who want flexible, affordable finance for up to four years. It has terms of 12-48 months.

Flexiloan Lite is geared at businesses trading 6+ months, with terms of 3-12 months. It’s best for businesses in early-stage growth phase who need quick access to capital, though more established businesses can also use it as a business loan.

You can apply if you’re a limited company or limited liability partnership with at least four partners, are UK-based with one director living in the UK, you’ve been trading for at least six months and you have a minimum monthly turnover of at least £5,000.

If you’re a sole trader or a non-limited partnership with fewer than four partners, you can apply if you want more than £25,000.  

Funding Circle

Loan limit: £10,000-£500,000

Repayment term: Two to six years

Type of finance: Unsecured loans

Time take for approval: Typically within 24 hours but can be as little as five.

Can I repay early? Yes

Interest rates starting at 3.9 per cent per year with Funding Circle.

You must have a minimum two years of trading history to get finance with Funding Circle. To apply, you may also need business bank statements for up to eight months and your latest full unabbreviated accounts – profit and loss, detailed profit and loss, balance sheet information.

There are no fees for early repayment.

I’m still not sure if fast business funding is for me

Before you decide on fast business funding, read over some other options, as linked below:

Borrowing money to pay for stock: inventory finance, credit cards, loans and more

Best small business loans in the UK

The benefits of invoice finance

How to choose the right finance option for your SME

Further reading

Raising start-up capital – who to turn to? – Being a founder can be a lonely business, especially when raising money for your start-up. Don’t worry, help is at hand. These advisors will either invest, help you crowdfund or put you in the best possible place for seed funding

The post Fast business funding and loans appeared first on Small Business UK.

Small business owners are being urged to apply for finance before the predicted economic slowdown makes increasing numbers of businesses uncreditworthy.

UK Finance, the trade body for British banks, said that rising interest rates, soaring inflation and a possible recession could have a devastating impact on the ability of many SMEs to qualify for credit.

SMEs are therefore being advised to assess how much money they may need to survive a downturn, and apply for finance now, even if they do not need the extra funds immediately.

Stephen Pegge, managing director of commercial finance at UK Finance, said: “If you wait until the downturn has hit, and find you are in urgent need of finance, it may be too late.

“It is better to think ahead and act now to get a financial buffer to last the next year or two. That way, if you are asked to provide any additional information to support your application, you will have time to do so. And your business – and the financial position of your customers – will probably look in better shape.”

Recent data shows many companies are already being declined finance. A report released earlier this month by the Federation of Small Businesses (FSB) reported that a record low proportion of just 43 per cent of firms that applied for finance were approved in the first quarter of the year.

UK Finance disputes this figure, suggesting the true proportion of approvals is around 75 per cent.

But whatever the reality was earlier this year, there is little doubt that finance companies are likely to become more cautious as business conditions deteriorate.

See also: Borrowing money to pay for stock: inventory finance, credit cards, loans and more

Improve your chances when you apply for finance

There is no one-size fits all approach to business finance, since nearly all loans and credit facilities are negotiated individually, depending on the company’s unique circumstances.

Generally speaking though, banks and specialist lenders will take different views for newer companies when compared to more established firms.

If your company has been trading profitably for some time, you may not be asked to put up any security or personal guarantees – banks may be happy to lend based on your good credit record, solid repayment history and healthy profitability.

However, most banks will also look ahead at your prospects and the evolving economic environment, so the more evidence that you can produce to prove you are a good risk when you apply for finance, the better.

7 top tips to get your credit application approved

#1 – Prepare a cashflow forecast

You may be asked to produce a cashflow forecast, with income and expenses set against each other for the period of the finance agreement. Unfortunately, rapidly rising prices are making it increasingly tricky to produce accurate costings, because nobody knows what prices are going to be in six months or a year’s time. If this is an issue, show a range, and explain how your business would cope in the worst-case scenario, which shows the lender you have thought through all eventualities.

#2 – Show customer contracts or documented orders

If you can show that you have a certain amount of business effectively guaranteed from your customers, collate the paperwork to provide to the lender if asked.

#3 – Put up security

If you are a relatively new company, the lender is likely to want some security in the form personal guarantees, which make the borrower personally liable for the debt. This could put personal assets such as the family home at risk if you cannot repay. It’s a big commitment – if your business struggles then you could end up being made bankrupt. But if you have faith in your business it will greatly increase the chance of getting the money you need.

#4 – Build up a good credit history

Another common problem for younger companies is they often don’t have an established credit history. So, it can be wise to build up a credit profile even if you don’t need to borrow for anything.

For example, if you know you are going to need sizeable finance at some point in the future, consider taking some smaller loans to pay for business items even if you could afford to pay for them in cash. This way, you can establish a good credit record that will enhance your chances of being approved for a bigger loan later on.

#5 – Tidy up your bank statements

Some lenders will want to see three or six months’ bank statements to assess the state of the business. It can therefore pay to defer any large expenditure until after you have secured your finance so that your bank statements look healthier. There’s nothing dishonest about this, it’s just good housekeeping.

#6 – Consider finance to smooth out cashflow

There are numerous finance schemes designed specifically to help with cashflow problems. There are straightforward cashflow loans, which are usually unsecured, and approved solely on the track record and prospects for the business. But in common with many other business finance schemes, they almost always require personal guarantees.

Alternatives include invoice finance and asset finance. These are secured on your outstanding invoices or business assets such as machinery. However, it is becoming more common for lenders to ask for personal guarantees even with assets or invoices as security. Too many lenders have been stuck with specialised industrial machinery that they can’t sell – who wants an £80,000 second-hand embroidery machine, for example? You can see their point.

#7 – Go to a broker

Business finance brokers can be invaluable because they know the lending criteria used by the various finance houses and can quickly match you up with finance companies that best suit your needs. Business finance is a minefield and there are many, many other types of finance and loans that I have not mentioned here. Brokers are well placed to advise you on finance products that you may not even have heard of.

They also help prevent wasted time with failed applications to lenders that use algorithms to filter out unwanted applications. Firms such as Funding Circle, Capify and Fleximize, among many others, assess various parts of your application with an algorithm, but exactly what these computer systems are checking for varies from firm to firm – some check for County Court Judgements (CCJs), some check the status of your VAT payments, some check your latest accounts or financial position with Companies House.

If you don’t know the criteria, you could waste valuable time approaching firms that would never consider your business if you apply for finance.

Brokers can be a great shortcut and can often find finance even if you have a less-than-perfect credit history. The downside is that they charge an average of 5 per cent to 7 per cent of the amount borrowed. For many, though, it’s a price worth paying.

Nick Gardner is a director at Air Exchange, the UK’s only money transfer auction platform for SMEs

More on small business lending

Improving your small business credit rating

The post SMEs urged to apply for finance before it’s too late appeared first on Small Business UK.