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Business Finance
Kal Woodley breaks down business finance.
What is a business loan? How does business finance work?
A business loan is essentially debt loaned against the value of the company or its growth projection. Lenders tend to like it when you’re using the business loan for that specific business, but you can potentially use a business loan for any commercial purpose.
The lender will review your plans and make sure that makes commercial sense to your business and to them.
What are the types of business loans?
They do vary. The options are secured, unsecured, cash flow, overdraft, venture capital, and VAT loans which is an interesting one. There are also things like leverage buyout and management buyout structures.
For example, let’s say you are a dentistry practice and you want to purchase another dentistry practice and its books, and you have contracts with the NHS as well as private clients, a lot of lenders can use those projections and contracts to raise funding for the purchase.
They also come in other different forms. Invoice financing is really popular with the work services market – such as temporary recruitment consultants. They might be supplying temporary workers to a warehouse company and paying those workers on a weekly basis, but the payment terms are 90 days with the client company. There’s a cash flow problem there. Invoice financing helps bridge that gap.
A lender will take that invoice and raise finance against it so you can pay your workers. You can go up to you know 90-95% of that invoice which really helps with the cash flow for your business. We also do quite a bit of export and import financing as well. So if you’re buying a high value asset you can make staged payments until the asset arrives on your premises.
There are different varieties out there in business loans and lenders that will quite happily help you.
How much can I borrow with a small business loan?
There’s no specific limits. For a multi-million pound company a small business loan could be £200,000 but typical small business lending could be anywhere from £10,000 to £50,000.
Short term borrowing is the key and it needs to have a specific purpose. It’s very tailored towards your business and how you intend to use it.
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Can I get a business loan with bad credit?
Yes, it is possible to get a business loan with bad credit. It will limit your options, but some lenders will ignore credit because a lot of it’s manual underwriting.
They will ask you about why the bad credit came about, whether the debt is settled and if there is any knock on effect to your current business.
If you’ve had bankruptcy in the past they will want to understand your story. If the situation is explained right to the underwriter it can usually be overcome. I’ve had clients declined and accepted for all different types of reasons. We need to find the right lender with the right appetite for that bad credit, and the reason for it would need to be comprehensively explained.
How can I improve my chances of getting a business loan?
You don’t just knock on a door and ask for money. You need to come with a business plan and other material, for example, up-to-date accounts. You wouldn’t believe the amount of clients that don’t have their accounts ready.
You need to get your paperwork in order because if the broker doesn’t push you to do it, the underwriters are only going to ask for it. If you don’t have it ready then, you’ve wasted everyone’s time.
If you’re self-employed, work with your accountant on a good, comprehensive business plan to buy a company or equipment. It’s about how the loan will help with growth, or increase your sales and drive revenue and profit. You might include a five to seven year plan for example. It’s about painting a picture of what the loan will allow.
Some people may need money to recruit staff. You don’t need a big business plan for that. That’s a good reason. But you need to give a clear indication as to how the loan will be used and how it will be repaid. That’s really what you need to have ready to start sourcing business loans.
How does the application process work?
It really is lender specific. They will only ask for what they need to see. Some lenders will ask for more, some will ask for less – but I’ve never seen a lender that hasn’t asked for up-to-date accounts.
So have your accounts and a projected business plan ready as they are required in most application processes – but don’t be surprised when further underwriting questions come your way.
It’s not the underwriter or the lender trying to frustrate you – it’s because your business is not like someone else’s, so they will have specific questions. It’s not just filling in boxes. It doesn’t happen like that.
How can a financial adviser help?
A good broker or financial adviser will be there to take the stress out of the process and help you with your preparation. We’ll make sure we have a good justification, a business plan and the basics in terms of documentation. Then we will source the cheapest, most effective loan.
What I would say is don’t flood the market. Don’t take your business loan to multiple lenders at the same time – some will do credit file checks and that creates a lot of heat on your record. Ask your broker to find a couple of lenders that fit the bill.
We can place that loan for you and sanity check your work. We’ll make sure you have a good exit plan and a clear strategy in place. You do need a second pair of eyes that’s independent of you and the lender.
