Finding Small Business Loans

Before you take the leap…

Getting a small business loan is one of the most common ways of getting hold of the funds required to start or grow your business. However, that doesn’t mean that it’s the right solution for everybody. But before you start your funding research, think things through, and ask yourself these questions:

Credit – Do you or your business have a poor credit rating? Many alternative lenders consider the bigger picture – not just your credit history, but a negative rating could harm your chances of getting a loan. It could also result in higher interest rates being applied.

Assets – Do you have sufficient assets (such as your own house) to back the loan and act as security? If not, do you know somebody who does and who’s willing to act as a guarantor? Once again, you could qualify for finance without security, but it does make it more difficult, and can result in higher rates.

Friends and family – Are you able to borrow the money from friends and family, thus avoiding the need to get the bank involved?

Investors – Do you have a solid business plan with a demonstrable chance of growth and success? If so, it may well be worth considering taking your proposals to investors. They can provide the necessary funds in exchange for shares in the business.

Research finance providers

Here are some of the most popular companies offering small business loans:

Traditional banks – Traditionally, the small business loan market in the UK has been dominated by ‘the big four’, namely Barclays, NatWest, RBS and Lloyds. In recent years, however, banks have reduced their lending to small businesses. In fact, if you look at the Funding for Lending have reduced Scheme announcements, you’ll see that in the last year bank lending to SMEs has declined by almost £1 billion. Also, a recent BBC study has shown that lending by high street banks to businesses has fallen by £2.3bn since June 2012.

Challenger banks – As the name suggests, so-called ‘challenger banks’ such as Aldermore and Handelsbanken are aiming to take on the big four as small business loan providers with attractive interest rates and flexible lending criteria.

Investment finance – This involves selling off part of your business to an investor. Companies such as Angels Den can arrange this for you for a fee of around £1600 plus 5% of the funds received.

Peer-to-peer lending – An increasingly popular option, peer to peer lending platforms such as Zopa and Funding Circle offer small businesses funding from investors on flexible terms.

Crowdfunding – Websites such as Kickstarter can help you to pitch your product to a worldwide audience. In exchange for the finished product or other compensation, you can raise the necessary funds to put your ideas into action.

Raise your own capital – Many people have money tied up in property, so remortgaging your home could be a great way to free up some capital. Another asset which you could sell is your car – you can always lease another. You can put this down as a business expense and it’s tax-deductible.

Other sources of funding – There are a number of other products, too, such as Aldermore's invoice finance, Fleximize’s revenue-based funding and a host of asset-backed finance products.

Prepare your business plan

To source any finance for a new business, you will likely need to have a detailed business plan, which includes the following information:

A detailed description of your product or service – What is it, what does it do and what are your unique selling points?

Market overview – Who are your target customers? Who are your competitors, and how will you stand out against them?

Pricing structure – How much will you charge? What is your profit margin?

Organizational structure – Lenders will want to understand who is involved in your business and what their roles are.

Sales and marketing – How are you going to promote your business and drive those all-important sales?