How to get a business loan for your start-up

If you’re looking to start your business or expand your start-up, you may be considering taking out a business loan to finance your plans.

With the proper funding and financial support, your start-up could invest in new technologies, enter new markets, and hire more employees.

Applying for a business loan can seem complicated and confusing, especially if it’s your first time.

In 2023, 62% of founders said getting funding would be their biggest challenge over the next year.

That’s why learning how to apply for a business loan is essential for turning your start-up dreams into reality.

We’ve simplified the process into key steps to help increase your chances of a successful application.

Types of business loans

Borrowing money to fund your business is known as debt financing. 

By taking out a business loan, you receive a sum of money that you agree to repay over time, usually with interest. 

This is different from equity financing, where you sell a portion of your business in exchange for capital.

Debt finance typically comes with a fixed repayment schedule, so you know exactly when and how much you need to repay, which makes it easier to plan financially. 

Interest payments on the loan are often tax-deductible, which can help lower your tax liability.

There are several types of loans you can apply for, but not all are equally suitable for every start-up.

One of the first decisions is whether to get a secured or unsecured business loan.

• Secured loan – this type of loan is usually offered by banks and uses something you own, like your home, as collateral for the loan. Because the loan is backed by an asset, it’s also called asset-backed lending. The advantage is lower interest rates and the ability to borrow larger amounts. However, If you fail to pay back the loan, the lender can sell this asset.
• Unsecured loan – this loan allows your business to borrow money without using any assets as collateral. Examples of unsecured loans include cash flow loans and working capital loans. As they are riskier for the lender, these loans usually have higher interest rates.

Types of business loans include:

Bank loans

These traditional business loans from banks offer competitive interest rates and longer terms.

They typically require good credit and collateral.

To apply, you’ll likely need to submit financial statements, a business plan, and a personal guarantee, among other documents.

Start Up Loan

A Start Up Loan is a personal loan for business purposes designed for new entrepreneurs, with a fixed interest rate of 6% per year.

A Start Up Loan doesn’t require collateral and includes 12 months of free mentoring.

To apply, you’ll need to provide documents like a business plan and cash flow forecast for assessment.

Peer-to-peer (P2P) lending 

Start-up businesses can use online platforms to connect with individual investors.

This alternative to using traditional banks can offer more flexible terms. 

However, the application process might take longer, and there could be fees for using the investor platform. 

P2P loans may not have the same protections as those offered by a traditional lender, which means you may face legal action if you don’t make repayments. 

Other forms of short-term debt financing include:

• lines of credit – lines of credit are flexible loans that let businesses borrow up to a set limit as needed, which could be ideal for managing cash flow. Lenders typically require a solid credit score and a good business history for a successful application
• working capital loan – this helps businesses manage cash flow gaps and cover day-to-day operational expenses, which might include payroll, rent, and inventory. It is typically repaid through regular instalments over a set period
• merchant cash advance – this type of loan is an advance against future sales, which could be suitable for businesses with consistent credit card sales. Applications are done online, but you may wish to investigate their typically higher fees and short repayment terms.

How to apply for a business loan for your start-up

1. Identify why you need a loan

Be prepared to explain why you need a business loan and how the money will be used.

Do you need the money to get your idea off the ground, or to cover start-up costs such as product development, marketing, or leasing space?

If this is the case, then a term loan may work for you, as it provides a lump sum for specific purposes.

If, however, you’re looking to expand your team and hire new talent, a line of credit could offer the flexibility to cover payroll as needed without interest on unused funds.

A working capital loan might be appropriate for covering daily operations like rent, utilities, and inventory.
When calculating your costs, you may want to be as detailed as possible, separating costs into categories such as marketing and equipment.

This can give you a clearer picture of your start-up’s financial health and how a loan might impact it.

It could also be helpful later in the application process.

2. Research business loan providers

Not all loan providers are the same – you may find some more suitable for your business needs than others.

Your options could include high-street banks, specialist lenders, independent investors, or organisations such as Start Up Loans.

Carefully research the terms and conditions of the loans, as these can differ depending on the provider.

These terms and conditions can include interest rates, loan security, and repayment schedules, all of which can vary greatly.

Some lenders may offer flexible repayment options, while others could have stricter terms.

These factors could affect how much interest you’ll pay and what assets might be at risk if you can’t repay the loan.

For example, a loan secured by assets may require you to pledge equipment or personal property, which could be seized if you default.

It’s a good idea to seek independent financial advice before committing to a loan.

3. Gather everything you will need beforehand

Before applying for a loan, think about collecting all the information and documents required.
Different lenders may ask for different things, but you will likely need:

• business bank statements – used to verify the income and spending related to your business
• a business plan – this should include a breakdown of how much you’re asking for, why you need it, and how you will use the loan to convince lenders to accept your application. Download our free business plan template to help you get started
• personal details – loan providers will ask for proof of ID, such as your passport or driving licence. You will also need to provide proof of your address on a document such as a recent utility bill, which is typically required to prevent fraud and money laundering schemes
• financial forecast and balance sheet – loan providers typically want to see your business’s projection of future revenue, expenses, and profits to assess your ability to repay a loan. This may include a Profit and Loss statement (P&L), revenue and expense estimates, cash flow projections and growth assumptions

While application processes can vary, most share similarities.

Many lenders require applicants to meet specific criteria, so consider checking those before applying.

For example, lenders might require that your business has been operating for a minimum or maximum amount of time, a specific credit score, or a certain revenue level.

For example, a Start Up Loan is only available to businesses that have been trading for less than three years.

After you’ve applied, the lender will usually perform an eligibility check and credit score check.

This is to ensure your business meets the required financial standards and can handle the loan repayment.

Some loan providers may request an interview with applicants depending on the type of business, the amount of money being requested, or the loan type.

During this interview, you might discuss your business plan, goals, and how you’ll use the loan.

You may also talk about your personal finances and any collateral.

5. The loan outcome

Reviewing a start-up business loan application can take a few weeks, depending on its complexity and the lender.

If your application is approved, you’ll receive a formal loan offer.

You should carefully review the offer’s details, including any associated fees, interest rates, and repayment terms.

This could help you check that the offer aligns with your start-up’s financial capabilities.

Before you accept, be sure to remind yourself of the loan’s terms and conditions and the repayment schedule, to see how it could impact cash flow.

If your loan application is rejected, you can ask why.

Most lenders will provide feedback on the reasons for rejection, such as credit score issues or insufficient business information.

You may be able to use this information to improve future loan applications.

For example, you might try to improve your credit score or strengthen your business plan.

Remember – just because one loan provider said no, that does not mean you can’t apply for your business loan elsewhere.

Learn more about your options if you’re turned down for a loan.

Common mistakes to avoid

Here are a few common mistakes start-up owners make when applying for a loan.

Think about how you could avoid these to have a better chance of success:

1. No clear business plan

A vague or missing business plan could weaken your loan application.

Consider... developing a well-considered business plan outlining your goals, market strategy, and financial projections.

2. Ignoring credit scores

Poor credit scores, both personal and business, can limit your loan options.

Consider... conducting regular credit score checks and working on improving it before applying for a loan.

3. Weak collateral

Offering insufficient or irrelevant collateral could hurt your chances of securing a business loan.

Consider... providing assets that are valuable, relevant, and easily appraised.

4. Not researching lenders

Applying to the wrong lenders may result in poor loan terms.

Consider researching lenders thoroughly to find one that offers favourable terms and suits your business needs.

5. Unclear use of funds

Lenders typically want a clear purpose for the loan.

Consider... being specific about how you intend to use the funds and how it will impact business growth.

6. Overlooking cash flow

Not planning for how loan payments will affect cash flow can cause problems.

Consider... creating a repayment plan that ensures you can comfortably meet obligations.

By avoiding these common mistakes, you could increase your chances of successfully getting the loan you need for your start-up.

Tips for securing a start-up business loan

Before submitting your loan application, consider the following:

• paying close attention to detail during the application process – a single misspelt word or wrong number could jeopardise your application. Double-check your application before you send it off, or have a trusted friend read it over with fresh eyes
• establishing a strong relationship with lenders – especially local banks, Community Development Finance Institutions, or credit unions, could improve your chances of getting approved. Attend networking events to potentially demonstrate commitment to your business for future loan opportunities
• keeping an eye on your credit history – to secure a loan, banks may need proof that you’ve borrowed money in the past and paid it back on time. Doing this can give you a good credit score and history, making your application more likely to be accepted. You can check your credit score with companies like ClearScore
• applying for only one loan at a time – this could improve your chances of securing a loan and make the process less complicated. Use a loan calculator to calculate how much you could receive and the interest rate to make an informed decision
• checking if you qualify for any available grant – the government offers several schemes and grants for start-ups and small businesses, and not having to pay back borrowed money can be a big relief on your finances
• offering a personal guarantee – this could give lenders more confidence in your start-up, and help assure them you’re committed to repaying the loan, which could mitigate the higher risks associated with new businesses.