How a new small business can get a loan

For those building a business from the ground up, a new 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 startup.

Peter Adams, Sarah Bridge Published on 05 February 2020. Last updated on 13 July 2021.
How a new small business can get a loan

It’s not an exaggeration to say that small and medium-sized businesses are the backbone of the UK economy. The Department for Business, Energy and Industrial Strategy estimated that SMEs represented more than 99% of the 6 million businesses operating in the UK in 2020.

Without startups, 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 depends on the financial products that startups and small businesses have at their disposal. Being able to access funds is often crucial for new businesses that might not have a large budget to spend in the early days. Some might be lucky and have enough to get them started, but still need extra liquidity to get them over the line. Either way, a new small business loan could be the difference between success and failure.

Taking out a loan involves credit checks, financial planning and a lot of business paperwork and means business owners have to commit to monthly repayments for the term of the loan. It’s a good idea to research all the different small business funding options at the very start, to get the bigger picture of what’s available.

With that in mind, here’s how to go about getting a business loan for a new small business owner today.

Why do you need a small business loan?

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.

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 secure financing.

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 NerdWallet’s guide to business loan applications.

What types of loans are available to new small businesses?

There are a wide variety of business loans new business owners can apply for when seeking funding to expand operations and boost growth. It’s all a question of how long you wish to borrow for and how long you think it’ll take to reach your goals.

There are short-term lines of credit that serve as ideal first-time loans for small business ventures if you need that cash injection over a short time frame. 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.

» COMPARE: Business credit lines

While small business loans can’t be used to purchase property or pay off existing debts, you could put your loan to use by 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 cashflow can’t afford.

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 cashflow in those early years of operation.

How to get a new small business loan

As with any business loan application you will need a business plan, cashflow forecast and financial projections for the next five years if you want to increase your chance of securing a startup business loan.

Accruing this information will help you understand how large a loan you need to ask for, as well as demonstrate to the prospective provider that you are serious and fully understand your financial circumstances and obligations.

Once you have your materials prepared, you’re ready to contact credit unions, banks, online lenders and peer-to-peer business lenders to request a startup small business loan. You’d be well advised to compare offers and ensure you’re acquiring a loan on the best possible terms.

» MORE: Are you considering taking out a small business loan? Know the pros and cons of small business loans

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, and there are a growing number of online-only lenders or small, regional banks beginning to offer new small business loans. But banks are often reluctant to lend to new businesses that are unable to show an established track record.

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 option and it allows businesses to seek cashflow on a smaller scale, from individuals or even other businesses with cashflow to spare.

Crowdfunding is another form of alternative finance, in which small businesses and start-ups access finances via special crowdfunding platforms. 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.

There is also the ‘Startup Loans Scheme’ which was created and funded by the government through the British Business Bank and its subsidiary Start-Up Loans Company to try and bridge the gap between lenders and startup businesses.

As well as mentoring and other support, the scheme provides personal loans to business founders.

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 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 to assess creditworthiness.

That’s why it’s important to maintain a good credit score in your personal finances. If your business is new or yet to launch, the absence of an existing business credit score means that lenders will check your personal credit history to see whether or not they want to lend to you.

As your business grows, you might be able to apply for a traditional business loan later down the line, so it is important to always be aware of your business credit score and how to improve it.

Can you get a new small 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. Lending to a small business will be considered less of a risk if they have a track record in paying off their debts. The higher your credit score, the greater the chances you’ll have at acquiring a loan with lower rates of interest.

Lenders don’t always agree on what constitutes the ideal credit score for a new small 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. Scores of 200 or lower make it highly unlikely that you can find someone willing to lend.

However, lenders could still be 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.

How can I improve my chances of getting a small business loan?

If you have a good personal credit score then you will have a better chance of getting approved for a new small business loan. If you don’t there are several steps you can take to improve your credit score.

In the short term you should:

  1. Register to vote. Lenders use the electoral register to check your address is correct.
  2. Check for mistakes. Make sure the information on your credit report is accurate, and contact the credit reference agencies to get any errors corrected.
  3. Set up direct debits. Late or missed payments can have a significant impact on your credit score. Set up direct debits so your bills are paid on time automatically.
  4. Stop applying for credit. When you apply for credit it shows up on your credit report. Applying frequently in a small window of time can hurt your credit score.

In the longer term, you should:

  • Keep your balance low. Lenders assess your credit utilisation when looking at your credit report. This is how much of your available credit that you are using. (If you have a £1,000 credit limit and a balance of £500, your credit utilisation is 50%.) Getting close to your credit limit can be a red flag to lenders, as it could mean you are struggling with your finances.
  • Pay your bills on time. Late or missed payments will damage your credit score, so ensure you make all your repayments on time. The simplest way to do this is by setting up direct debits from your current account for your bills.

These are also great ways to ensure your business has a good credit score once it is more established which will stand you in good stead if you wish to apply for other types of business finance as your company grows.

» COMPARE: Small business loans

Image source: Getty Images

About the authors:

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. Read more

Sarah Bridge has been writing about business and finance since 2000. She was formerly Deputy Editor, Personal Finance, The Mail on Sunday and was previously the paper's Leisure Correspondent. Read more

Looking for business finance? Compare business loans now

If you have any feedback on this article please contact us at [email protected]