The Good, the Bad and the Ugly of Small Business Loans

Starting a small business is never easy, and the vast majority need financial support to kickstart their growth. For this reason, many budding business owners inevitably turn to business loans as the solution. Unless you really know your stuff, the world of business finance can seem like a lawless land of cowboy lenders. In this guide, we’ll guide you through the Wild West of small business loans.

The Options Available

Generally, there are two broad types of loans available to British businesses: secured and unsecured. A secured business loan requires the commitment of assets as collateral for the borrowed amount. These assets could include commercial property, vehicles, stock or machinery. This gives the lender some reassurance that they won’t lose out if you cannot fulfil your repayments.

An unsecured loan doesn’t require any collateral. However, the lender might request a ‘personal guarantee’ from a registered business director. Before choosing this route, it’s important that the borrower and guarantor are fully aware and happy with the potential consequences if the repayment doesn’t quite go to plan. Deciding between a secured and unsecured loan often depends on whether you have assets that would be acceptable collateral.

The Good

In most cases, business loans are much more flexible than many budding entrepreneurs expect and will allow you to readjust the terms to cover unforeseen business expenses. However, you should keep in mind that some lenders will ask about your intended use of the funds as part of a risk assessment. If your plans change slightly from what you initially stated during the application, lenders are unlikely to raise objections if you keep up with repayments.

After being granted a business loan, making regular, timely repayments will benefit your credit score. Demonstrating responsible financial behaviour will stand you in good stead, and you could see your score rising. This is a significant upside to taking out a business loan if you’re confident that the amount you borrow is manageable.

The Bad

There are some downsides to business loans that small businesses, particularly, should be aware of. ‘Time in business’ requirements have the potential to be a stumbling block for startups. If your company has been operational (and profitable) for at least two years, your chances of approval are higher. Despite this, some lenders will be open to considering your loan application with just six months of trading or have no requirements whatsoever. These providers could be a very good option for small businesses.

Another disadvantage is the mountain of paperwork that is often required. Most lenders will request your personal and business details, financial documents, licences, registrations and other relevant documentation. Additionally, you might be asked to produce a list of your existing debts and accounts. This is an essential part of the loan application process for many lenders and can be time-consuming and stressful.

The Ugly

There is, of course, always a risk attached to business finance. If it all goes wrong, you could put your business in danger. Revenue decreases, unforeseen costs, staffing challenges and supply chain issues are just a handful of the factors that can hamper your small businesses’ ability to keep up with loan repayments.

If your business misses a loan repayment, it will be recorded on your company's credit history. A one-off is generally not a major concern, as the lender will reach out to discuss the delay and assess the situation. On the other hand, if you miss multiple repayments, this can lead to additional charges being imposed on your account, and the entire loan amount could become due immediately.

If you choose to pursue an unsecured loan, there is more risk involved because lenders require company directors to offer a personal guarantee, making them personally liable. If you cannot repay a loan, the creditor's first course of action will be to negotiate settlement terms. If an agreement can’t be reached, the creditor will issue a statutory demand or County Court Judgment (CCJ), putting your assets at risk.

The only means of releasing yourself from a personal guarantee is to renegotiate the loan terms, reach an agreement or declare bankruptcy. Even after your business has been liquidated, a lender could still pursue you for loan repayment under the personal guarantee. Our business finance experts can help you discover your best loan option so don't worry if you're not sure how to proceed.

Preparing Your Application

If you decide to proceed, the first step is to prepare your business’s application. To increase your chances of having your small business approved for a loan, proper preparation is essential. You should start by determining the precise amount you will require and be prepared to tell the lender the specifics of how the funds will be utilised.

Lenders will evaluate your business's financial health and ability to repay the loan based on the documentation you provide. It’s vital to have a comprehensive business plan, balance sheets, bank statements, tax information, and any necessary licenses or registrations readily available.

Another critical factor in the application process is your business's credit score. If you’re unsure about your credit standing, it would be wise to request a credit report and review it for any potential issues. You can easily access your Experian Business Credit Score for free.

Finding the Best Small Business Loan

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