How To Obtain A Business Loan: Step-by-Step Guide for UK SMEs

Increase your SME loan approval chances with our step-by-step process

In today’s economic climate, nearly half of SME loan applications are rejected, leaving many businesses struggling to secure the funding they need.

However, with the right approach, your business can overcome these hurdles and obtain the financing necessary for growth—whether it’s for new equipment, expansion, or covering everyday operating costs.  

Understanding the different types of loans available and crafting a strong, well-prepared application can significantly boost your approval chances. In this guide, we’ll walk you through the loan application process step by step and show how FundOnion’s platform can connect you with the right lenders, making it easier to find the financial support your business deserves.

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Common Obstacles in Obtaining Business Loans

Securing a business loan can be a daunting task, especially when you're faced with multiple roadblocks. 

But knowing these challenges in advance can help you navigate the process more effectively and increase your chances of approval. Whether it's limited trading history, lack of collateral, or rigid eligibility requirements, understanding how to address these obstacles is key to finding the right funding solution for your business. 

Don't let these hurdles stop you from getting the financing you need to grow—here's how to overcome them.

1. Limited Trading History: Many lenders require at least two years in operation, making it tough for newer businesses to qualify. Exploring alternative lenders or government-backed schemes can offer more flexibility.
2. Lack of Collateral: Some lenders require personal or business assets as security, which smaller businesses may not have. In such cases, unsecured loans or invoice financing can provide useful alternatives.
3. Complex Application Process: The paperwork and documentation required by traditional lenders can feel overwhelming. Platforms like FundOnion can help streamline this process.
4. Stringent Eligibility Criteria: Revenue and credit score requirements may block some businesses from qualifying. Focusing on improving your credit profile or targeting lenders with more flexible criteria can improve your chances.

Securing the right business loan doesn't just come down to filling out forms. With the competition for funding fierce, and many applications rejected, it’s crucial to take a strategic approach. Whether you're a start-up or an established SME, preparing properly can mean the difference between securing a loan with favorable terms—or facing costly rejections. By following a structured process, you can improve your chances of finding the right lender, submitting a successful application, and ensuring that you obtain the funds your business needs to grow.

Here are the 3 steps that will guide you through securing the right loan for your business—from laying a solid financial foundation to finalizing your loan application. Let’s get started on your path to securing the best business loan. 

Step 1: Preparing Your Business for a Loan Application

This first step ensures your financial situation is strong, giving you the best chance for approval and favorable terms. Without proper preparation, you could face delays, increased interest rates, or even rejection. Let’s break down the key actions involved in getting your business ready for a loan application.

Action 1: Assess Your Financial Health

Before approaching any lenders, you need a clear understanding of your business's financial health. Lenders will closely scrutinize this, so ensuring your finances are in good shape will significantly boost your chances of securing a loan with favorable terms. Here's where to focus:

a) Obtain Your Credit Report

Start by getting  a comprehensive credit report for your business from UK agencies such as Experian or Equifax. Your business credit score is a major factor in loan approval decisions. A score of 80 or higher on a 100-point scale is considered strong.

To improve  your credit score:

• Pay bills on time: Late payments harm your score.
• Reduce your credit utilization: Lower balances relative to your credit limit reflect well.
• Check for errors: Correct any inaccuracies in your report that could negatively impact your score.

b) Gather Financial Documents

Having all the necessary financial documents ready will make the loan application process smoother. Typical documents requested by UK lenders include:

• Bank statements (last 6 months)
• Company tax returns (last 2-3 years)
• Profit and loss accounts
• Balance sheets
• A 12-month cash flow forecast

This documentation proves your business’s financial health and readiness for a loan.

c) Evaluate Your Cash Flow and Debt-to-Income Ratio

Lenders will assess your debt-to-income ratio to understand how well your business handles debt. You can calculate this by dividing your monthly debt payments by your monthly gross income. A ratio below 36% shows that your business can comfortably manage additional debt.

If your ratio is higher, you might want to:

• Increase revenue streams.
• Pay down existing debt to improve this ratio before applying.

Action 2: Craft a Strong Business Case for the Loan

Once you’ve assessed your financial health,  the next crucial step is to create a compelling case for why the loan is essential to your business and how it will be used. Lenders want to see that the loan will directly contribute to business growth and success.

a) Define the Loan Purpose and Amount

Be very specific about why you need the loan and the exact amount you require.

For example, if you need £50,000 for equipment, clearly explain how this will lead to a 30% increase in production or other tangible benefits.

b) Create a Repayment Plan

Your repayment plan should be realistic and based on projected cash flow. It will demonstrate to lenders that you’ve considered the financial impact and are prepared to meet your repayment obligations.

Action 3: Prepare a Comprehensive Business Plan

A well-prepared business plan is essential for presenting a clear vision of your business’s future and how the loan will help you achieve it. Your business plan should include:

• Executive Summary: A brief overview of your business and how the loan will support its growth.
• Market Analysis: Insight into UK industry trends, your target audience, and competitors.
• Financial Projections: Detailed projections covering your expected revenues, expenses, and profits for the next 3-5 years.
• Marketing Strategy: How you plan to attract and retain customers to grow your business.

A well-organized business plan shows that you’ve carefully thought through the loan’s impact on your business and how it aligns with your growth strategy. 

Each action you take in Step 1—from assessing your financial health to crafting a compelling loan case—will take you closer to the success of your application.

Step 2: Understanding Your Loan Options

When it comes to financing your business, it's important to explore different loan options. Each loan type offers distinct benefits and considerations tailored to meet varying business needs. Let’s break down the available options and their specifics.

Action 1: Choose from Secured & Unsecured Business Loans

One of the first decisions you’ll make is whether to pursue a secured or unsecured loan. Each option comes with its own set of features, so it's important to weigh them carefully based on your business needs.

Secured loans are suitable for larger investments, offering lower interest rates and longer repayment terms, but they require collateral, putting your assets at risk. In contrast, unsecured loans provide quick access to funds for short-term needs without requiring collateral, though they typically have higher interest rates and shorter repayment periods.

Differences Between Secured and Unsecured Loans:

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Action 2: Check Alternative Financing Options

For SMEs facing cash flow challenges or unconventional borrowing needs, alternative financing options may provide more flexibility than traditional loans. Some useful alternatives are:

a) Invoice Financing

• What It Is: Borrowing against unpaid invoices.
• Typical Advances: Lenders usually advance 80-90% of the invoice value.
• Fees: Lenders typically charge 1-3% of the invoice value per month.
• When to Use: Ideal for businesses with long invoice cycles that need faster access to working capital.

b) Merchant Cash Advances

• What It Is: Repayments are taken as a percentage of your daily card transactions.
• Repayment Rate: Generally between 10-20% of daily card sales.
• Factor Rate: Lenders charge between 1.1 to 1.5 as a factor rate.

When to Use: Best for businesses with steady card sales looking for flexible repayments.

c) Asset-Based Lending

• What It Is: Lenders offer loans based on the value of your business's physical assets.
• Advance Rates: Lenders may offer:some text
  • 70-80% of inventory value
  • 50-80% of equipment value‍

‍When to Use: Ideal for asset-rich but cash-poor businesses needing to leverage equipment or inventory for financing.

Action 3: Evaluate Fees and Repayment Terms

When exploring your loan options, factor in any additional fees or costs that may affect your total repayment amount. Have a look at the breakdown of common costs:

a) Types of Fees:

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b) Choose the Right Repayment Term:

Selecting the appropriate repayment term balances cash flow and debt obligations. You can choose from-:

• Short-Term Loans (3-18 months): Ideal for covering temporary cash flow needs.
• Medium-Term Loans (2-5 years): Suitable for business expansion or equipment purchases.
• Long-Term Loans (5+ years): Generally used for major investments, such as property acquisitions or large-scale projects.

Selecting the right loan will depend on your business's needs, financial health, and future plans. Taking the time to assess each option will ensure you make the most informed decision for your business growth and stability.

Step 3: Navigating the Application Process

Successfully applying for a business loan involves choosing the right lender, submitting a strong application, and understanding the approval process. 

Let’s explore these steps in more detail.

Action 1: Choose the Right Lender

When selecting a lender, SMEs can choose between traditional high street banks and alternative lenders.

• High Street Banks: Offer competitive rates, such as 5%, but typically require two years of trading history and a 700+ credit score.
• Alternative Lenders: Provide faster approvals, sometimes within 48 hours, but charge higher interest rates, between 8% and 10%.

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Action 2: Submit a Strong Application

A well-prepared application significantly improves your chances of approval. Here’s how to build a strong case:

a) Required Documentation:

• Business Details: Companies House registration, VAT number, and ownership structure.
• Financial Information: Bank statements (six months), tax returns (last two years), and 12-month projections.
• Personal Information: Identification and proof of address for directors.
• Business Plan: Clearly define the loan’s purpose (e.g., expansion, equipment purchase) and your repayment strategy.

Ensuring accuracy and completeness will make your application stand out to lenders.

b) Avoid Common Pitfalls:

To avoid delays, follow these strategies:

• Double-Check Accuracy: Ensure consistency across all documents.
• Provide Context: Explain any financial difficulties, such as negative cash flow, and how you’ve addressed them.
• Realistic Projections: Avoid overly optimistic forecasts.‍
• Highlight Benefits: Clearly demonstrate how the loan will positively impact your business, whether by expanding capacity or entering new markets.

Action 3: Understand the Approval Process

Understanding the lender's approval process helps manage expectations. The key steps are:

a) Credit Assessment Steps:

1. Initial Review (1-3 days): Lenders check eligibility and application completeness.
2. Credit Checks (1-2 days): Business and personal credit scores are evaluated.
3. Financial Analysis (2-5 days): A detailed review of your financials.
4. Decision Process (1-3 days): Final assessment and loan decision.
5. Offer and Acceptance (2-7 days): Loan offer issued, and funds disbursed upon acceptance.

b) Meet Eligibility Criteria:

To increase approval chances, ensure you meet these requirements:

• UK-registered business
• 6-24 months of trading history
• Credit score of 600+

Annual revenue of at least £50,000

Action 4: Deal with Loan Rejections

If your application is rejected, respond proactively:

• Request Feedback: Identify weaknesses in your application.
• Improve Your Profile: Enhance your credit score or reduce debt before reapplying.
• Explore Alternatives: Consider peer-to-peer lending or crowdfunding.
• Submit an Appeal: If necessary, appeal within 30 days with additional supporting information.

By carefully following these steps—choosing the right lender, preparing a thorough application, and understanding the approval process—you not only improve your current chances of securing a loan but also build a strong foundation for future loan applications. Establishing good financial practices, maintaining a positive relationship with your lender, and responsibly managing your loan will enhance your business's credibility, making it easier to access additional funding as your business grows.

Empower Your Business Growth with FundOnion

Securing the right business loan requires careful planning, from assessing your financial needs to comparing lenders. Organised financial records, knowledge of your credit profile, and a defined purpose for the loan are essential steps toward a successful application

By understanding your options and planning strategically, you can position your business for sustainable success—ready to thrive in today’s competitive landscape.

FundOnion simplifies this entire process by offering a platform that lets you compare loan options quickly and efficiently. Whether you're a startup looking to get off the ground or an established business ready for its next phase of growth, FundOnion connects you with financing solutions that fit your unique needs.
Empower your business to grow with confidence—explore FundOnion today—your business's next opportunity is just a few clicks away!

FAQs

1. How Long Does It Typically Take to Get Approved for a Business Loan?

Approval times vary, typically ranging from a few days to several weeks. Traditional banks may take 1-3 weeks due to detailed assessments, while alternative lenders can decide within 24 to 48 hours.

2. Can I Get a Business Loan With Bad Credit?

Yes, it's possible but more challenging. Lenders specializing in high-risk loans may offer options, often with higher interest rates and stricter terms. Preparing a strong business case can improve your chances.

3. What's the Difference Between a Business Loan and a Line of Credit?

A business loan provides a lump sum with fixed monthly payments over a set period. A line of credit offers flexible access to funds up to a limit, allowing withdrawals as needed and charging interest only on the amount used.

4. How Much Collateral Do I Need for a Secured Business Loan?

Collateral for secured loans typically ranges from 70% to 100% of the loan amount, including assets like property, equipment, or inventory, depending on the lender's policies and your financial situation.

5. Are There Any Government-backed Loan Schemes Available for UK SMEs?

Yes, the UK government offers several schemes for SMEs, such as the Bounce Back Loan Scheme (BBLS) and the Coronavirus Business Interruption Loan Scheme (CBILS), providing favorable terms like lower interest rates and extended repayment periods.