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How to Get a First-Time Small Business Loan

For those building a business from the ground up, a first-time business loan can be a great way to deliver rapid growth. Learn how to get a first-time business loan to help make a success of your start-up.

It’s not an exaggeration to say that small and medium-sized businesses, including start-ups such as yours, are literally the backbone of the UK economy. That’s because the Department for Business, Energy and Industrial Strategy estimated that SMEs represented 99.9% of the 5.7 million businesses operating in the UK in early 2018.

Without start-ups such as the one you built from the ground up, the economy as we know it would be entirely different. Growth is often at its fastest pace among new businesses, which see a gap in the market and move quickly to fill it.

Part of that growth story might depend on the financial products start-ups and small businesses have at their disposal. Perhaps you have enough to get started, but need extra liquidity to get you over the line? It might be time to consider requesting a first-time business loan.

Check out small business funding options, to get the bigger picture of what’s available.

With that in mind, let’s learn what it’s like to get a business loan for a first-time business owner today.

Why do we need first-time start-up business loans?

Start-ups can have a wide range of reasons for requiring a first-time business loan. The most obvious reason is a lack of sufficient cash flow to invest in more staff, equipment and other expenditures to help drive growth.

With the Bank of England having kept interest rates low for the last decade, the loans market has benefited from cheaper borrowing costs. The flip side of this is that savings rates remain low, meaning these accounts effectively serve primarily to segregate funds, rather than to provide any notable return.

If you’re wondering how to get a first-time small business loan, it’s important to acknowledge that, from a commercial lender or bank’s point of view, lending to a small business or start-up with little in the way of credit history or a credit score can be an issue. A lender will be weighing up the risks associated with providing you with a loan.

With little to no evidence of credit history, it might prove to be much harder to acquire finances.

However, if you’re seeking a business loan but you’re unsure about where to begin, a good place to start is to check out our how to prepare for business loan applications guide here.

What kinds of first-time business loans are there?

There are a wide variety of business loans first-time business owners can apply for when seeking to expand operations and boost growth. It’s all a question of how long you wish to borrow for, until you’ve reached your goals.

There are short-term lines of credit which serve as ideal first-time loans for small business ventures, if you need that cash injection over a short timeframe. These types of finance can last between a month to four years at most, and are commonly used by businesses who simply need a cash boost early on, to get things moving in that initial phase of expansion.

While small business loans can’t be used to purchase property or pay off existing debts, you could put your loan to use, acquiring new machinery for your workplace, as just one example.

Longer-term financing is often sought out by those needing first-time business owner loans, especially when a business owner sets their sights many years into the future. This could mean requiring a loan to invest in new equipment to increase productivity, or to expand business operations by hiring more staff, which current levels of cash flow can’t afford at present.

Longer-term business loans can extend out as far as 10 to 20 years, and may require collateral and a limit on the amount of additional finances a business might wish to seek in the future, but they are often well-suited to smaller businesses which expect to see rapidly-expanding cash flow in those early years of operation.

Can you get a business loan on bad credit?

One of the major first-time business loan requirements you will be aware of is the need to have a good credit score. The higher your credit score, the greater the chances you’ll have at acquiring a loan with lower rates of interest. Lending to a small business will be considered less of a risk if they have a track record in paying off their debts.

Lenders are still willing to offer you first-time business loans with bad credit, but higher interest rates will come into play, putting potentially greater strain on your business.

As with any first-time business loan, always compare and contrast the requirements of each lender and be clear about what you know you can afford, before agreeing to the terms of a loan with bad credit.

What kind of lenders are there?

There are different types of lenders out there, able to cater to a range of business needs. The obvious choice is a traditional high-street bank, but in more recent times, banks have apparently been giving UK SMEs the cold shoulder.

In response, small businesses have responded by shunning traditional sources of finance in favour of more flexible and hi-tech financing solutions, otherwise known as alternative finance. Peer-to-peer (P2P) lending is a popular workaround for small businesses who are aware of alternative finance already or simply those denied a loan by traditional high-street lenders.

It allows businesses to seek cash flow on a more small-scale, from individuals or even other businesses with cash flow to spare.

Crowdfunding is another form of alternative finance, in which small businesses and start-ups access finances via special crowdfunding platforms. In most cases, these platforms offer up equity from one business for smaller ones to make use of.

A benefit of using crowdfunding is that it often includes rewards schemes, which offer investors a finished product in exchange for the contributions they make in some cases.

Build up a picture of what’s available from the markets today, by comparing some of the leading small business loan providers.

Does personal credit impact business loans?

In case you’re wondering what impact credit scores have on business loan applications, just remember that there are separate files kept for personal and business purposes.

Personal credit isn’t actually an exact indicator for the overall health of any business, or how good it would be at repaying its debts in practice, but in many cases, personal credit scores are the only thing available to lenders in order to assess creditworthiness.

That’s why it’s important to maintain a good credit score in your personal finances, as it might be the next best thing to determine whether you can get a small business loan or not, in the absence of existing business credit history.

What’s the ideal credit score for a small business loan?

Lenders don’t always agree on what constitutes the ideal credit score for a first-time business loan, but if you start to get scores of 800 points or higher, out of 1000 points, you would be considered to have an exceptionally good score by most lenders. This would often give you access to most of the small business loans you could ever need, with a wide range of interest rates.

Irrespective of how lenders measure scores, a number of 200 or lower makes it highly unlikely that you can find someone willing to lend. If you find some providers who do lend despite a low score, they might present you with a narrower range of loans to choose from, with higher levels of interest.

In an ideal world, you would want to aim for a credit score that gives you access to the greatest number of loans from the most lenders possible, as this gives you a greater chance to find more affordable loans that better-suit your financial situation.

Business loans for start-ups and small businesses can be that much-needed boost they need to get them where they need to be - powering ahead as the backbone of the UK economy.

Want to learn more about business loans and how the lending environment changed in the last year? Check out Know Your Money’s extensive Guide to Business Loans for 2019 - in our guide, we break down the latest trends to be mindful of, and some easy-to-follow steps to take out a business loan.

Written by Peter Adams

    Published on 05-02-2020

    Updated on 02-04-2020

Peter reports on a number of areas in the personal finance sector, with a particular interest in supporting businesses and individuals in the UK services industry.

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