-    Credit rating

-    Profitability

-    Company history

Your credit history will establish to the lender the likelihood for you to default on the credit, hence the risk surrounded to offering the loan. This is particularly prevalent for sole traders and partnerships, as the risk is generally higher due to less assets / capital available. If you have a history of late payments or bankruptcies you should include an explanation of your previous circumstances and current changes with your credit application. You should never try to hide a poor credit history as a log of all previous activity will be available to the lender.

Your company’s profitability will be assessed a long with your projections to establish the length and likelihood of your loan repayment. This along with your trading history will show the lender how long you have been in business, how you’ve been operating the company and whether you’ve been making the correct business decisions. Also a key factor in the application is the loan use, as you need to demonstrate that the funds will be put to good use.

Loan Repayment

You will need to clearly demonstrate how you will be repaying the loan. This will involve providing the lender a history and breakdown of your earnings and a projection of future earnings. It may be worth visiting your accountant to gain help in providing a clear presentation of Profit and Loss (P&L) and future projections. When involved in communication with the lender it’s important to convince them how personally committed you are to the overall success of the business. It is better to be more “hands-on” than “hands-off”.

Self Employed/ Small Business Personal Loan

For self employed and small businesses it may be worth considering a secured or unsecured personal loan to raise capital. This may be easier to obtain however you are personally liable for the debt rather than the business therefore it’s more risky to you personally.

Business start-ups

Borrowing within today’s volatile market isn’t easy and banks will make decisions on the basis of ability to repay rather than the security that a business can offer. If you are planning to buy a piece of equipment for example, UK small business loans for start-ups could be the ideal way of raising the finance. A secured business finance loan is the best way to make costly purchases and avoid having to repay an overdraft at a moment’s notice.

Banks prefer small business loans, as it enables them to be more consistent lenders, rather than having to reclaim money if the economy takes a dive.  Lenders will also prefer regular payments that they receive from a business loan. Please note that interest rates for new, unproved businesses tend to be high.

Loan Interest Rates

When applying for a business loan you must decide whether to take a variable or fixed interest rate. A floating rate varies as the base rate of interest moves while a fixed rate is specified for the term of the loan.  

Fixed Interest Rate

With a fixed interest rate on your loan you will pay a set amount each month. As it is fixed, the rate will not increase or decrease with the market rate, allowing you to predict how much you will be paying on the loan each month. On the downside, you will not benefit when the market rate drops below the level set against your borrowing.

Variable Interest Rate

With a variable interest rate, your interest rates will fluctuate with changes to the bank’s base rate (or LIBOR). As a result your interest rate will be the current market rate plus the predetermined premium for the amount you borrowed. While you may benefit from a drop in interest rates, you could just as easily be subjected to a hike in interest rates. Also note that the longer you take to repay your loan premium, the higher the total level of interest will become.