Smaller amounts of funding are generally available to a broad spectrum of businesses, but all banks & other lenders have a consistent goal, which is to only lend to you if you can afford the repayments.
Speaking generally, here’s what lenders want to see to make an offer of funding:
It also helps to be able to demonstrate that your business is well organised and looks professional, so it is a good idea to:
These rules can seem a bit arbitrary, and some lenders may be more willing than others to take more risks in certain areas. But that’s the kind of business profile most mainstream lenders want to see. So why are these important and what can you do now to achieve them? Here’s what to focus on:
As a rough rule of thumb, banks and lenders are typically able to offer credit worthy businesses around 10% or 15% of turnover. This gives banks and lenders confidence that your business can invest in stock or manufacturing costs, pay any employees, pay you what you need to support your own life and make the repayments on the loan.
If your business is growing well and profitable then lenders look on this favourably and might offer you up to a slightly higher percentage of your turnover.
For smaller amounts of funding up to £25,000 lenders will typically expect to be repaid in up to 24 months and so consider each business’ ability to repay over this time period. Banks may offer longer terms than 24 months, as do some asset finance providers who often provide terms that align with the expected lifespan of an asset.
Act Now: If your turnover isn’t meeting these criteria, but you need to borrow to grow then it might be worth considering other possible sources of money. Read our guide to alternative financing options if you want to find out more.
There are some funding options up to £25,000 open to new businesses, including start up loans, for example. Some businesses have accessed small amounts of debt funding after only 6 months of trading from their bank or some alternative lenders with appetite for younger businesses. However your chances of securing funding increase significantly if you can show consistent revenues for least 12 months of trading, and have filed a set of accounts at Companies House, if your business is registered.
Act Now: You can’t speed up the passage of time, but you can use your early months to professionalise your new business and make sure you’re in a good position to apply for credit later. And, again if you simply can’t wait then there are other options you can try. Read our guide to alternative financing options if you want to find out more.
Just like with lending to an individual, banks and lenders want to see a credit history for registered companies that gives them confidence your company can and will repay a business loan.
So if you’ve been declined for lending and you want to understand why, or if you are planning to apply for lending and want to improve your chances, then taking a good look at your company credit file is an important step.
There may be small issues that are actually really easy to resolve. Perhaps you have a CCJ in your company’s history, perhaps you even feel you had a perfectly good reason for not settling a debt but now it’s on your credit file for six years.
Checking for those kinds of credit blemishes and settling them (even if that feels frustrating!) is key to becoming a customer that lenders want.
Otherwise, that damaging information sits on your history for six years and can make it harder, more expensive or even impossible to qualify for lending.
If your credit score is less than perfect then don’t despair, you may still be able to get a business loan. But any steps you can take to improve your score will help.
Act Now: Check your company’s credit score and see what actions you can take to polish your record. Lenders are also likely to look at the personal credit score of any company directors too (see below).
You should also be aware that failing to file your company accounts on time can have a really significant impact on your score so stay on top of your paperwork!
Potential lenders are also likely to look at the business owner’s own credit history.
So, take a close look at your own history and see if you can make it stronger. If you’ve never really used personal credit and need to improve your score then there can be really easy wins, like registering to vote or using a credit builder credit card.
Act Now: Until you look at your personal credit file, you might not be aware of what’s on it. Get the data and see what you need to do to resolve anything outstanding.
Needing to register for VAT can be a real barrier to business growth because so many small business bosses just don’t want the extra hassle.
You must register to collect the tax when your turnover exceeds £85,000 a year but you can also choose to voluntarily register if your turnover is below that.
Not only does registering for VAT makes you look more professional, it also stops that artificial barrier from encouraging you to hold back your growth to avoid paperwork.
Act Now: You can register your company for VAT directly with HMRC, whether you’re doing it voluntarily or because you’ve reached the turnover threshold.
Operating with a separate business current account to any personal accounts is absolutely key to showing potential lenders that you are a responsible and professional. It also helps the bank understand how you run your business.
Act Now: This is one of the simplest actions you can take: find a business bank account that suits you and open one. Moving your money management into a bank account can actually be a relief as it separates your own finances from your business and makes both easier to manage.
A fundable business has a track record of paying its suppliers and any other invoices on time. This shows you’re sensible with money and also that you have good structures and systems in place – so again, that you are a professional and safe business to lend to.
In the early days of a business, without good payments systems, it can be easier to overlook debts and pay late, but missing the payment of invoices will cause real harm to your credit score, to your reputation with suppliers and to your chances that lenders will consider you.
Act Now: No matter what stage your business is at, make sure you pay your bills on time. Setting up good and reliable systems to pay invoices and other bills is essential to your long-term success.
If you’re self-employed and have not incorporated your business, then while banks may consider applications for funding consistently with registered companies, there is generally less information available for them to undertake assessments, and other lenders either don’t provide funding to self-employed businesses or have quite different risk assessment criteria for them. This means that outside of the banks, lenders are 4x as likely to fund companies that are registered with Companies House than those operating as a self-employed business.
When you are setting up your business therefore, or even if you’ve been trading for a number of years, you may wish to consider incorporating as a limited company by registering with Companies House.
Many entrepreneurs begin as a self-employed business because that’s simply the easiest way to set up. By the time you’re seeking funding, being incorporated could make it easier to get funding.
Registering your company does come with extra bookkeeping responsibilities and a very small annual cost but there are quite a few benefits for a growing company.
Act now: It takes just a few minutes to register with Companies House, just make sure you understand the extra obligations such as filing annual accounts. Consider professional advice on setting up a limited company.
By the time you’ve taken care of those short-term actions, your business will already be looking more polished and reassuring to lenders, so there are some easy wins there.
You can then do more to professionalise and grow your reputation. That will promote your long-term creditworthiness and will also help your business function better and more smoothly.
Many businesses are so busy growing and surviving the day-to-day challenges that they don’t pause to invest in their long-term financial prospects. But the difference between a surviving company and a thriving one could be the systems and support they set up early on.
Enlisting an accountant, business advisor even a broker can help you decide if you’re ready for loan financing and how you can demonstrate that you’re a good potential customer.
A lot of those earlier tips on becoming fundable are easy wins that you can do yourself. But finding the right expert to compliment your own business knowledge can help you accelerate growth while staying focused on the things you’re good at – managing your team and serving your customers.
You can often arrange a free consultation with an accountant in your area to discuss the options, benefits and costs.
It may be the work of weeks, it may take a few years – it will depend on your individual business and on which areas you need to work on.
A business that can tighten up its processes, repairs any early mistakes and seeks the right advisers is going to do more than attract lending, it’s in a stronger position to really thrive and grow.
The really important thing to remember is that even if your business has been declined for funding, this does not mean a lender doesn’t believe that your business will be a success in the future. It just means you need to do a little bit more now to demonstrate exactly how much potential your company has.