How to apply for a business loan

If you’re looking at expanding your business, hiring new staff or bridging a finance gap, then taking a loan from your business bank can be the way forward.

Applying for a business loan is not just case of walking in and simply asking for the money – you need to prove why you need it and how you’re going to spend it. You need a business plan and a sound idea of what you want to get from the loan. Here’s how to apply for a business loan.

Write a Robust Business Plan

Provide as much information as possible to your bank by writing a business plan. Banks want to know everything about your business, the ins and the outs: the good, the bad and the ugly. Don’t be tempted to paint a rose tinted picture of your business. All banks will be happier to work with an entrepreneur who veers on the side of caution, rather than unfounded optimism.

Remember to read up on how to write a coherent business plan first and how to prepare appropriate forecasts such as balance sheet, profit and loss and cash flow.

Know What You Want and Why

Know exactly how much money you want the purpose and how long you want to spread the repayments over. For example, do you need to borrow the full loan amount, or is the loan just to cover a deposit? What timescale will the repayments be spread over and are there any assets that can be used as security?

It’s important to have all of this information ready to show to your bank when they ask for it. Providing answers to all possible questions illustrates that you’ve done your homework on the loan and know your business inside and out.

There’ll be a lot of difficult questions asked, but it’s important that you get back with a response as soon as possible. If it’ll take you more than 24 hours to answer one of the bank’s question, be proactive, call them and explain why that’s the case.

Show How You’ll Spend the Money

Provide your bank manager with explanations as to why you need financing and how you will use the money. Detailed, planned forecasts are required and it’s best to be as specific as possible.

For example, if you need a new piece of machinery or equipment, provide them with the purchase cost, running costs, depreciation calculations for the duration of the loan repayment period.

Additionally, and most importantly, provide evidence as to why this purchase, with the bank’s capital, will boost your business and help it grow.

Know Your Weaknesses

As mentioned before, you need to let your bank get close to all of your finances and future growth plans. You want to show that you’ve run your business well in the past and plan to for the future. This information helps to illustrate that you are a sound investment and instil confidence in you.

Understand any risks your business will be exposed to and relay them to your bank advisor who helps manage your company’s account. If you can identify areas of weakness with your ideas and how to remedy them, your financier will have a better chance of understanding your business, and how to help you.

Offer Security

The burning question the bank will want to know is how they will get their money back. Explain and prove how you’re going to manage repayments or default options. Security can help sway the loan decision in your favour as banks are interested to know if there are multiple “exit strategy” options. The first and most desirable option is you repaying the loan with interest. That goes without saying.

The second and third options are less desirable and may include liquidating assets or collection of debtors. This is a route that your business does not want to go down. 

Make your repayment plan clear, make it simple and make it financially attractive. If you aren’t risk averse, show that you have enough security to back up the loan in the way of machinery, property or other assets such as invoices. 

If you’re unable to provide these in the form of company assets, personal assets can also be put at risk. However, depending on the type of loan, you may need to provide your personal finance information regardless – so don’t be surprised if you’re asked to reveal all.

Look Around

It will pay to shop around when looking for a bank loan. This isn’t just to get the best deal, although interest rates and terms can vary; some banks simply will not lend to you depending on your business type.

Some business financiers require at least 2 years of trading history and certain revenue thresholds. This means that it is crucial to find not only the right financing terms for you, but the right bank that has experience supporting your type of business.

Ask the Experts

Get professional help. If you’ve already got a business account with a bank you should check to see if a financial advisor’s expertise is included in the terms and conditions. Often businesses overlook the chance to gain professional advice from their banks.

If you’ve been banking with one institution, it’s more than likely that they will be familiar with your business and have a vested interest in your success. Additionally, the FSB (Federation of Small Businesses) can provide independent advice to UK businesses.

See also: Is it difficult to find a loan to help grow your business? – Many businesses find it difficult to secure business loans, but what is the reason for this? Is it down to access or is it down to a fear of funding?

Praseeda Nair

Praseeda Nair

Praseeda was Editor for from 2016 to 2018.