Reasons for this trend include:
Despite a move away from traditional business borrowing, we’re seeing a revolution take place with the growing popularity of ‘challenger’ banks, digital lending and alternative finance options. These options have helped many small businesses secure funding away from the traditional players, contributing to the very way they operate and thrive today.
For those who still see value in borrowing to support long-term growth, we’re here to help. With a range of templates and downloadable resources; advice from leading finance providers and unique Know Your Money data insights, we’ve compiled our ultimate guide for businesses looking to take out a business loan.
Lenders such as iwoca are now able to offer prospective customers a business loan decision within four minutes, while most traditional banks don’t even have an online user journey for this type of finance. Easy-to-use online accounts and automation have also helped to retain customers, further improving the popularity of these providers.
This has been partly thanks to the UK government’s progressive regulations, designed to promote market competition and fill the estimated £2.2bn funding gap. Namely, several schemes have been set up to encourage SMEs to use new-style lenders as an alternative to traditional high street banks and brokers.
One such example is the Government’s alternative remedies package, designed to improve the capability of eligible lenders to compete with RBS in the provision of banking services to SMEs. Also, Open Banking, which forces the UK’s biggest banks to share their data securely with approved third parties, is giving new lenders the ability to compete more effectively.
Next, we might see the Bank of England roll out a new data platform that will store financial information from SMEs and help them access funding. This would combine the Open Banking scheme with company data so that more lenders can feel confident about providing finance to smaller enterprises.
Despite these developments, the concept of a business loan, or business finance, is still unchanged at the core. Providing you can meet a lender’s eligibility criteria, you can potentially secure access to varying amounts of capital to support the running and growth of your enterprise.
So while the packaging might look very different today, the impact business funding can have for organisations is still significant. And with SMEs forming 98 per cent of private sector businesses and employing over 16 million people across the country, we’re likely to see an increase in the use of external finance yet again, as confidence grows in these new channels.
Today, a collection of challenger banks and alternative finance providers offer businesses of all shapes and sizes access to new funding options. As well as better approval chances, we’re seeing customer borrowing experiences enhanced through the use of innovative online technology and streamlined borrowing processes.
Challenger banks are companies that leverage online technology and software to streamline retail banking. At Know Your Money, we’ve seen interest in these providers grow from 30 per cent in 2017 to 44 per cent in 2019.
First emerging when large financial institutions took a step back after the global financial crisis, these startups focused on offering typically lower fees, better user experiences and increased transparency, which has changed the way both commercial and personal finance works for its customers.
One of the strengths of these challenger banks is their ability to offer digital user experiences – both fast and intuitive by nature – in comparison to the lengthy banking processes offered by their predecessors.
Catering especially to demographics that were once short of viable banking options, they can offer competitive services and user experiences.
To further demonstrate the rise of new-style lenders, our own data gathered at Know Your Money shows us there has been a considerable decline in the popularity of traditional banking options.
New style lenders 2017
New style lenders 2018
New style lenders 2019
In 2017, 85 per cent of our traffic went to business loan brokers & traditional direct lenders during a time when we didn’t host the same breadth of new style lending options that you can see on our comparison tables today.
Fast forward to 2019 and the popularity of P2P and new direct lenders on our platforms has increased.
Know Your Money’s traffic data also reflects the rise of new style lenders, such as peer to peer lenders Funding Circle and new style challenger Iwoca. This category of ‘new style lenders’ have risen from 15 per cent of total click share on our comparison site in 2017, to 33 per cent in 2019.
Moreover, a look at Google Trend Data for business loans over a 8 year period adds global context to this pattern, with the overall rise in interest for business loans coinciding with a growing popularity for lenders such as Funding Circle and Ratesetter – two of the largest new style lenders on the market today.
To put this into focus, interest in traditional bank loans during this same period remains predominantly static, with new lending options gradually taking more and more of the traffic share for business loans over time.
This is a clear indication that businesses are now keen to explore what innovative finance options can do for them. While brokers and traditional loans still have a place today, it is clear that the market has opened up massively, with borrowers exploring the many new funding options available to them.
"If you are unsure of what products you need or what is available, use a reputable comparison site or financial broker. There are constantly new products coming to market so make sure you are getting the best finance for your specific circumstances." - Sharif Mohamed, Head of Affiliate Partnerships at iwoca
Determine how much money you need, and why
Before you’re able to search for business loans on the market and approach lenders, you’ll need to answer a few essential questions:
One way to wrap all the answers into one package is to create a business plan. You may already have a number of documents that outline your business goals, but the task now is to accurately assess your current position as an enterprise, along with your targeted milestones over the next few years, factoring in the business finance you are hoping to secure.
This will also be a strong supporting document to your business loan application and may even be required by some lenders. We’ve developed a comprehensive downloadable business plan template you can fill in when you have time. However, for those in a hurry, here’s a quick glimpse of the kinds of things you should record.
"It’s important to look at the overall package you’re getting from your finance provider. Some alternative finance providers will offer no early repayment fees and flexible terms, but it’s also worth considering what wider business support they can offer to your growing SME. This can come in the form of discounted services and tools to help you manage your business, or even drop-in sessions to help you better understand what lenders look for when assessing an application."Peter Tuvey,CEOFleximize
Decide on your preferred finance options and lender
Once you’ve accurately calculated the amount of funding you’ll need to support your various business goals, you can start to think about the best borrowing options. Naturally, if you only need a short-term boost of capital to purchase a one-off item of equipment or stock purchase, you’ll be in the market for a very different kind of finance compared to if you were preparing for a large merger or acquisition, for example.
Here's what the current landscape looks like for business finance options:
We would also recommend asking your business network and approaching lenders directly, to get a full sense of the best deals on offer. Brokers can also play a part in this process if you are looking for some expert advice on how to navigate the terrain.
As you can see, there’s a lot to choose from. And when it comes to comparing these options, obviously we recommend you use a clear and transparent comparison site like our own, to inform your research.
During this stage, also consider whether you’ll actually be eligible for your preferred loan types before you apply. If you can eliminate options that are simply unfeasible, a great deal of time can be saved when it comes to completing your business loan applications. This will also help you to protect a healthy credit score as the more checks that are done on your business; the lower your score will typically be (more on this later).
Whichever finance option you go for, ask yourself the following questions:
Once you’ve chosen your preferred finance option, explore the market for lenders and create a shortlist for comparison. Before you settle on anyone in particular, make sure you perform effective due diligence on each provider by delving into the lender’s reputation in the market by comparing user reviews and testimonials.
Brokers can sometimes help you here by digging a little deeper when it comes to understanding how your potential finance provider’s business is structured, where the funding comes from and what typically happens in the event that borrowers cannot pay back their loan.
"The majority of businesses do not know what is available to them prior to applying and often take what is offered first. However, this might not be the right financial solution for them, despite getting an approval, so make sure you get the right advice before accepting."Jamie Stewart,Director atThink Business Loans
Business loan brokers are professionals who help businesses find financing. They work by bringing your business loan application to different lenders and coming back to you with potential offers.
Good brokers can be a valuable resource – offering professional advice and information during the process. Loan brokers may charge you a percentage of your total loan amount after it’s secured, which can be as high as 15 percent in some cases or as low as 1 per cent in others.
Other brokers may be paid by the lender who might give them a lump sum fee for providing them with business. As such, it’s important to understand how your broker receives their slice and whether they have a vested interest in connecting you with certain lenders.
Potential broker advantages
Potential broker disadvantages
Save yourself time and effort
Possible additional broker fee
Draw from their industry experience
Risk of missing out on direct deals available
Professional due diligence
Paying for something you might be able to find yourself
Access to good deals that you would have missed yourself
May not have access to the right kind of loan that would suit your needs best.
Explanation of the application process
The broker's access to deals may be limited to only those he has a relationship with.
"If you are inexperienced in securing finance, have a poor financial history or your business is at a very early stage, it can be useful to get a commercial finance broker involved early. They know how to talk to lenders, which ones are most likely to look at you and are experts in helping you to secure the right loan."Bryan Charter,Director atEngineering Business Growth
Check your business credit profile
If you didn’t know already, your business credit score measures the creditworthiness of your company. It is based on your business's financial history, including loan applications, credit accounts, your loan repayment history and supplier payment times.
At this stage, it’s good to know whether your credit score could be an obstacle in your search for business finance before you invest any more time into the process. An accurate measure of your business credit profile will give you a better idea about whether lenders will accept your application.
A good credit score will make it easier for your business to secure business finance as well as better deals – meaning higher credit limits and lower interest rates.
A poor credit score achieved through missed payments or perceived poor financial health, will make your business less attractive to lenders and will almost certainly impact the quality of the deals available to you.
Essentially, the same rules apply to business loans as they do to personal loans. Banks and finance providers are primarily looking for security when it comes to who they lend to and the likelihood of finances being returned to them.
Also, paying attention to your business credit profile is generally good practice. Other companies, partners, investors or future clients may want to check your business credit profile before doing business with you – if it’s in good shape, this can inspire greater confidence in your enterprise.
"The best and most effective way to strengthen applications is to make sure that the last six months of your bank statements have no bounced payments!"Jamie Stewart,Director atThink Business Loans
Nearly three in five (59 per cent) small firms have never checked their commercial credit score. Of those that have, over half (56 per cent) hadn’t checked within the previous six months before applying for finance, according to Experian.
Viewing and accessing your business's credit score will typically require a paid service from a business credit file company. Here are some common options:
Experian offers either a one-time report and score or the option to subscribe to ongoing monitoring.
Account holders can receive an Equifax business profile report and get access to their Equifax Business Credit Risk Score.
Dun & Bradstreet
Dun & Bradstreet (D&B) generates both reports and scores for businesses that have credit files with them.
Call Credit offer a ‘statutory credit report’ which is a one-off snapshot of your credit report and credit history.
While business will have their own credit profile, there’s nothing stopping lenders from checking up on the personal credit records of your business's partners and directors. Therefore, it’s worth assuming that your personal credit history is going to be evaluated as well as your business credit score – to cover all your bases.
If you find out you have a poor, or non-existent credit score, then you might have to build your profile before applying for a loan. Not doing so may harm your chances of success or getting a good business loan deal from lenders.
Here are a few things you can do if this is the case:
If you are in a rush to secure funding for your business, it may still be possible to borrow a startup business loan despite having a poor business credit history. Many alternative lenders will use ‘softer’ checks and may be less strict than high street banks when it comes to offering funding options. Again, explore your options thoroughly!
"Poor credit can be an issue with many mainstream lenders such as banks; however, iwoca, as well as other lenders, will take many other factors into consideration, such as credit scores of the directors, business performance and overall affordability."Sharif Mohamed,Head of Affiliate Partnershipsiwoca
Prepare for your business loan applications
While a business credit score is one measure of an enterprise’s strength as a commercial entity, there are many other factors that will impact the way lenders see you.
Businesses, especially online ones, can be complex beasts. Finding a tangible way to accurately value your enterprise, forecast future growth and prove your worth will help you secure favour with your chosen lenders.
To do this, here’s a list of things you might need to provide your lender during the application process.
Document type (Important components):
Business and personal credit score
Business valuation figure
Business and personal bank statements
(over the last two years, if possible)
Licences and registrations
Legal documents such as contracts
Business and personal tax returns
List of assets and equipment (potential collateral)
Before taking the plunge, it’s crucial to determine if your business really needs financing in the first place. Every small business could use more money, but financing and loans are not the same as generated funds. Whatever you borrow will have to be paid back – so make sure it’s worth it. Situations that might require funding are:
Apply for your business loan
Once everything is in order and you think you’ve found the right lender, you'll be ready to complete the actual application process. Remember, every lender is different, but here are some basic examples of how the process might work:
Example 1: Online challenger bank application
Example 2: Face-to-face business loan application at a high street bank
1. Fill in the online application form, providing digital copies of essential documents
1. Request an appointment with your finance provider (e.g. current high street business account provider.)
2. Receive a decision and a quote for how much you can borrow
2. Gather all your documents together, including your business plan and financial statements
3. Connect with a lending specialist from the finance provider
3. Present your application to your lender in person
4. Follow up with any additional documents or clarification
4. Follow up with any additional documents or clarifications
5. Accept or decline your offer
5. Wait for the decision to be made about your application
6. Review the result and your available borrowing options
7. Accept or decline your offer
"Borrowers are often not prepared for follow-up requests from lenders, such as additional documentation or up-to-date financials. If you are looking at finance, it is always useful to have this ready in advance."Sharif Mohamed,Head of Affiliate Partnerships atiwoca
Ultimately, you may be asked to provide a range of documents depending on the lender’s individual criteria. While some offer an incredibly streamlined process that can be completed in one sitting, others may require you to put more time and effort in, including a face-to-face meeting.
We’ve developed an example business loan application template to help you gather all the things you need in advance, but make sure you tweak it to cater to the requirements of your specific lender. Also, we recommend developing a strong business loan request letter, which will function as a cover letter for your application and help to create a strong first impression.
Finally, once you’ve submitted your application, use this opportunity to start building your relationship with your lender. Make sure you stay in touch and offer help in making the process go as smoothly as possible.
Whether it’s delivering missing documents promptly or clarifying information in your application, a strong foundation of communication and cooperation here will make managing your repayments easier in the future.
"It is very important to build a relationship with your lender once the loan begins; it’s an excellent way to prove to the lender that your business is growing, that you are trustworthy, and ultimately the lender will be happier to support all your financial needs in the future."Jamie Stewart,Director atThink Business Loans
Peer-to-peer lending (P2P) is a type of business loan where multiple private investors lend to a business, typically through an online platform. While this method will function similarly to standard business loans, in that borrowers still apply through a financial services provider, you won’t technically be borrowing the money from them. These platforms facilitate the process by pooling funds from different investors, offering an alternative to banks.
Successfully manage your business loan
If successful (congratulations!), don’t forget why you embarked on the whole process in the first place.
As well as putting into action the business plan you have created for your business, aimed at achieving sustainable growth, you’ll also want to make sure you can effectively repay your loan and keep your credit score in good health – you may need to access funding in the future, after all.
With the right management of your loan, you might even be able to pay off your debt sooner, especially if you can pay down larger amounts when times are good. To finish, we’ve listed Know Your Money’s top five tips for managing your business loan.
"One thing to remember is that having a flexible contract and being able to pay back as much as you want, when you want, will ultimately put you in charge of how much interest you pay. Businesses often make the mistake of taking a loan where you cannot pay back in chunks, as these options often come with a cheaper APR. By opting for flexible loans, clients are able to save hundreds on interest if repaid early or, if they need, can ultimately change the facility easily, if the liquidity of the business changes."Jamie Stewart,Director atThink Business Loans
1. Keep track of your business credit profile
A higher credit rating means you could work out a better deal in the future that allows you to pay off the loan faster, or reduce your minimum repayments. Things you should pay attention to are:
2. Avoid additional debt
If you find yourself running into trouble with repayments, don’t rush to take out a new business loan. Your first priority should be to cut back on costs or find ways to increase revenue. You can also consider consolidating your loans by transferring multiple loans into a low-interest account. Paying off your first business loan before you take out another one is advised.
3. Pay more when you can
If you have a busy period where sales are up, you could pay down your debt with more than the minimum repayments. This will reduce the amount of interest you pay overall and could give you breathing space in the future if times are tough and you need to negotiate an extension with your loan provider.
4. Communicate with your lender
Don’t underestimate the importance of having a good relationship with your lender. If you forecast financial hardship, or things take a sudden turn for the worse, it’s important to open up lines of communication with your finance provider before you miss a payment.
Lenders will often consider your circumstances and tailor a solution to your situation, which could mean:
5. Consider upgrading
Finally, it’s also a good idea to consider upgrading to a loan that has better terms when times are good. You can do this if you’ve maintained a good credit score and have met your previous loan obligations. Either your current lender or a new provider might offer you a loan at a more competitive interest rate, giving your company more flexibility to reach its growth potential.
"It is important to build a relationship with your lender. This will help you to understand their requirements in the first place, giving you the best chance of securing the loan. In addition, different types and sizes of organisations give different allowances to their account managers, who can make a case on your behalf if you get to know them."Bryan Charter,Director atEngineering Business Growth
It's encouraging to see new challenger banks and fintech products are giving small businesses more options than ever on how to fund their business growth. Capitalising on these opportunities is going to be key to fueling the UK economy through the current uncertainty.