Applying for Business Financing: Everything You Need to Know

Financing your business’ growth and expansion shouldn’t come with a headache. There can be lots of different parts to work out which can be quite overwhelming. So, we’ve put together this guide walking you through everything you need to know about business financing.

We’ll cover creating a business plan, the different types of business loans and financing options available to you, why you might get rejected, and how to improve your business applications in case they do get rejected. Let’s get started.

How to apply for business financing

Business financing can seem a tad complicated at times. We’ve created a step-by-step list of what you need to do.

• Create a business plan: If you’re applying for a traditional loan, you’ll have to have a business plan in place before you begin your application. Lenders will want to see that you have a solid business plan in place for growth or expansion before lending you any money. Creating a business plan will also help you to see if there are any flaws or oversights in your overall expansion plan, i.e. will it be viable? Is there a definitive business need for a loan? Do you project to see steady return on investment? etc.
• Work out how much you want to borrow: Any application you make will have to be for a specified amount of money (unless you opt for a credit line – which we’ll cover later). You’ll need to establish how much you will need to realise the goals you’ve set out in your business plan. If you borrow too little, you may have to apply for more credit in the near future. But, if you borrow too much, you’ll end up paying more interest than necessary. So, it’s pretty important to be as accurate as possible in estimating the potential cost of your growth or expansion so you only have what you need.
• Decide which type of business financing you need: There are several different financing options on the market available to your business. You need to work out which one would be right for you. We’ve covered the different types of business financing below with pros and cons for each so you can decide which would be a good fit.
• Make sure you’re eligible: Applying for a business loan isn’t so simple as writing a business plan and hoping for the best. You’ll also need to check you’re eligible for the loan you’re applying for. Some lenders will insist on checking your business credit score, annual revenue, profits, how long your business has been trading, and more.
• Check terms and conditions: Always read the small print. Some loans or business financing might seem perfect for your business until you look a little closer. Make sure to check each lender’s set of loan criteria and any terms and conditions attached to the loan. 
• Submit your application: Once you’ve found the loan type you’d like to take out, the lender you’d like to borrow from, the amount you need to borrow, and checked that you’re eligible, and able to pay it back, you’re all set to submit your application. We’d recommend having a financial advisor, or other business owners who have submitted a similar application in the past, to make sure everything is above board. 

How to write a business plan

Lenders love business plans. If your business doesn’t have one for your planned growth, expansion, or whatever else you’re using funding for, you’re not likely to get very far. Business plans are used to help you get approved for a loan by highlighting characteristics that lenders are going to be looking for before approving you for a loan. You’ll need to highlight what you do, your plans for what you plan to use the loan for, and how you plan to pay the money back.

You can find a business plan template here. We’re going to cover some basics, too, of some key steps within a business plan, why it’s important and what to include so you’ll know what to do when filling it out.

Executive summary: This is a short and sweet summary of what your business does. It can include information about the owner, the mission, your products and services, your business location(s), your revenue or profits, and much more. You can also add a brief description of what your expansion plans are.

Products and services: This is where you will cover what your business offers. You can describe what products or services you offer and how successful they have been with customers. This will help lenders see how viable your business is depending on what you sell and how well it performs.

Market research: You can cover everything you’ve learned about your market here. This is an important step as you’ll need to show that you’ve done your research into the market you’re in, potential for expansion, market trends, competitors, and any other opportunities you’ve found. Lenders will rely on this as a chance for you to demonstrate that the funding you’re asking for will be managed and invested well.

Operational plan: This is a section to cover the logistics and requirements of operating your business, and how you would plan to operate your business post-funding. You can go into detail about your business model and how that translates into what you do on a daily basis. For example, if you’re an apparel brand, you can cover manufacturing, warehousing, and distribution processes and costs, and how this might scale or improve with the funding you’re asking for.

Funding request: This section is where you’ll make your case for requesting funding including how much money you’ll need and why you need it. Lenders will want to see how the funding will be used, how you intend to repay the loan, how long it will take you to repay the loan, and even may request some revenue forecasts so you can establish how much you expect to make in the coming years.

Financial statements: This is a section where you’ll include all your financial information relevant to the loan request. You want to use your financial statements to prove to potential lenders that your business is stable, reliable, and will be able to repay the loan. Include up to five years of income statements (if your business has been operating for less time than this, you can send them what you have so far), cash flow statements, balance sheets, income forecasting projections (if you have them), capital expenditure budgets, and anything else you have that you believe could be relevant. 

What are the different types of business loans?

Business loans come in all different shapes and sizes, and we’ve by no means covered all of them. We have, however, covered the most common types of loans and financing options chosen by businesses looking to grow or expand their business. 

Some will seem perfect for you and what your business needs, and some might not look right at all. It all depends on your business, your goals, how quickly you’d like to repay the loan, and what you might be eligible for. Here are a few options you can choose from.

Secured business loan

This type of business loan requires your business to provide collateral as security. You will receive a lump sum of funds that can be repaid with interest over a predetermined period of time. However, valuable assets like equipment, vehicles, property, or even company shares for example, may serve as collateral to ensure the loan is repaid.

There is a reduced risk for lenders. If a business fails to repay their debt, the lender has the right to repossess the assets offered as collateral for the loan. The collateral acts as a safeguard making a secured business loan less risky from the lender’s perspective. Secured loans can, sometimes but not always, come with favourable terms, including the potential for a larger loan amount, an extended repayment period, and lower interest rates.

• Pros: Easier to acquire than other loans (due to decreased risk for lenders), and potential for larger loan sum, extended repayment period, lower interest rates.
• Cons: Failure to repay the loan can result in forfeiture of assets agreed upon as collateral. 

Unsecured business loan

Unsecured business loans require no collateral or assets as security. Similarly to secured loans, you will receive a lump sum that can be repaid with interest over a fixed period of time. Lenders will evaluate various factors when considering your loan application including your overall business financial situation, business credit rating, and more when determining whether to approve the loan.

Due to the absence of collateral, interest rates on unsecured loans generally tend to be higher compared to secured loans. While these loans are unsecured, certain lenders might request a personal guarantee. In such instances, the company owner or director commits to personally repaying if the business is unable to do so, assuming personal responsibility for the debt repayment.

• Pros: No need to use any assets as collateral. Plus, easier to access, with less paperwork being required as no assets are being used.
• Cons: Higher interest rates and, sometimes, lenders may ask business owners to personally commit to repaying the loan if their business can not. 

Merchant cash advance

Merchant cash advances are different from traditional loans. Unlike traditional loans with fixed instalments, the loan is repaid through card transactions. When a customer pays via a card terminal, a percentage of the transaction is deducted and goes towards paying off the loan. The lender and the provider of the card terminal work together to facilitate this.

Unlike a standard business loan, you don’t have to make a minimum or fixed repayment each month. Repayments are made solely from the card transactions, so the more money you make, the quicker you pay off the loan. The amount you can borrow will depend on a number of factors, including how much money your business makes from card transactions each month. As merchant cash advances are so heavily based on the income of your business, you may not be able to borrow as much compared to other types of loan.

• Pros: No credit checks and cash can be deposited into your account in less than 48 hours (depending on lender). Cash advance is paid back as a percentage of credit card sales rather than monthly repayments.
• Cons: Some cash advance schemes can come with higher interest rates (depending on lender).

Interested in a cash advance? Why not try Lightspeed Capital? Dabangg Group uses Lightspeed Capital to fuel their growth by investing in modern hardware.

“When it comes to opening a restaurant, there are a lot of overhead costs and capital assets we need to inject into the new sites. So, when Lightspeed Capital came in, that helped us maintain the infrastructure and invest in new systems.” said Joju Shibu, Purchasing Manager at Dabangg Group.

“Lightspeed Capital is optimised for the needs of the customers. Lightspeed has a better awareness of the requirements of the hospitality industry compared to other lenders, and caters to our needs. The traditional way of capital does not fulfil the exact needs of Dabangg Group. Lightspeed understands the requirements for hospitality businesses and the risk involved in the restaurant industry, especially when it comes to seasonal changes in sales.”

If you’re a hospitality business, you can learn more about Lightspeed Capital here. Alternatively, if you’re a retail business, you can learn more about Lightspeed Capital here.

Credit lines

Credit lines, also known as lines of credit, offer borrowers a line of credit where they can borrow as much money, or as little, as necessary. This is different to other loans which offer a single, fixed sum of money where further funding can not be requested until the original loan has been fully repaid.

Credit lines work similarly to credit cards, as the lender can set a limit on the amount that you can borrow. Once you have an approved limit, you can borrow funds up to this threshold whenever required. You will pay interest on the amount you borrow, rather than the entire credit limit. 

Credit lines offer increased flexibility over traditional loans as borrowers can borrow money in the future without needing to apply for an additional loan.

• Pros: Can request further funding without additional applications. Request what you need and only when you need it.
• Cons: High interest rates, late payment fees, and you can potentially request and spend more than you can afford to pay back.

Government loans

Government loans play an important role in fostering the development and expansion of businesses, with many national and regional initiatives in place. For example, the Start Up Loans scheme is an instance of a government loan. Businesses trading for less than three years that meet specific eligibility requirements can access loans ranging from £500 to £25,000. Successful loan applicants also gain access to complimentary advice and mentoring services.

Another program is the Recovery Loan Scheme, backed by the government. This scheme facilitates small businesses’ access to a diverse range of loans, including existing term loans, revolving credit facility, invoice finance, and asset-based lending. Needless to say, these are just examples of some government loans. There may be others that would be more suitable for your business.

• Pros: Specific loans and advice for different types of business with certain regional schemes on offer.

• Cons: Much the same as any other loan, if you’re unable to repay the loan then you could be held personally liable.

Bridging loans

Bridging loans are used by businesses, and individuals, who need immediate funding whilst they continue to look for long-term funding. These types of loans are mostly used for purchasing property, renovations, or even moving to a new office space. However, they can be used for other business purposes, too. For instance some businesses use bridging loans when they need an urgent capital boost, whereas others might use it for time-sensitive inventory deals.

Bridging loans are short-term loans that are priced monthly rather than annually. While interest is charged monthly, it is ‘rolled up’ and repaid at the end of the loan term as well as the original loan amount, and any further fees or charges accrued.

• Pros: Flexibility in different types of bridging loans available. Bridging loans can be ready in 24-48 hours (far quicker than other loan terms)
• Cons: High interest rates, arrangement and exit fees, and bridging loans are a type of secured loan (which could put your assets at risk if the loan is not repaid)

How long does it take to get a business loan?

Merchant cash advances can be in your bank account in as little as 48 hours. Traditional loans can take up to 90 days to process, unless you’re applying for a bridging loan which will be available much quicker. 

The amount of time a loan application will take to be processed, approved, and deposited into your account will depend on the lender.

Why was my loan application rejected?

Business loan and financing applications can get rejected for a number of different reasons. Frustratingly enough, banks and lenders are under no obligation to tell you why they’ve rejected your application which can cause needless confusion as to what you need to change. Your application might have been rejected due to:

• Insufficient income (meaning you can’t afford the loan)
• Poor credit score or history
• High credit card balances
• Incorrect information on credit file/loan application
• Fraudulent activity on credit file/loan application
• Business/employment is not seen as secure source of income
• Applicant(s) do not meet eligibility criteria
• Existing loans and credit agreements in place

What to do if your business loan application gets rejected

Try not to worry too much if your loan application gets rejected. It doesn’t mean that you won’t ever be able to apply for a loan or other funding, it just means you need to tweak a few things. Here are a few things you can try to make sure you get approved for funding next time:

• Improve your credit score
• Pay off any existing debts/existing loans
• Troubleshoot your business plan
• Find a Co-signer
• Consider a secured loan
• Minimise hard credit checks

Improve your credit score

Credit scores are a prediction of your credit behaviour. The greater they are, the more likely you are to repay loans on time and be financially reliable, and the worse they are, the less likely you are to repay loans or debts on time. If your credit score is not high enough, it could be a reason for your loan application being declined as you’re considered higher risk. You can improve your credit score in a number of ways.

• Use a credit building credit score to help improve your score (it’s important if you choose this step that you ensure you’re paying off your credit card bill each month). If you’re falling behind on payments, it can make your credit score even worse.
• Ensure you’re registered on the electoral roll
• Make sure you’re repaying other loans and debts on time
• Check the details on your credit file are correct and up to date

Pay off any existing debts/existing loans

If you have existing debts and loans, it can signal to potential lenders that you’ve taken out a lot of capital and haven’t been able to pay it all back. If they were to lend further funding, you would have substantially more expenses every month in debt repayments which can make repayment more challenging, and make you higher risk. 

Whilst you might want to expand your business now, if you’re applying for traditional loans, we’d recommend paying off any existing debts beforehand which can substantially improve your chances of being approved for further funding later down the road.

Find a Co-signer

Co-signers are effectively ‘guarantors’ who will apply for the loan with you. If they have good credit, they can improve your chances of getting approved for a loan. Alternatively, co-signers can also help you get a lower interest rate in some cases. However, you need to consider that if you are unable to repay the loan or default on repayments in any way, the burden of repaying the loan will fall back on your co-signer. Plus, it will further damage your credit rating and theirs.

Consider a secured loan

Secured loans require your business to provide collateral as security. Lenders generally see them as a more reliable form of lending as they can recompense some financial assets from you if you’re unable to repay the loan. Needless to say, secured loans can seem a little more threatening than other loans that don’t require you to put up collateral, but if you want a traditional loan and you’re sure you’ll be able to pay it back without missing payments, secured loans could be the right choice for you.

Minimise hard credit checks

If your loan application was denied, you may want to repeatedly try applying for a new loan again and again hoping one application might get approved. Do not do this. Multiple applications will come with multiple hard credit checks which, when done in quick succession, can take a toll on your credit score. Try and get to the root of the problem with your applications.