The covid-19 pandemic has taken a toll on small companies more than large companies. The UK economy shrank by 206%, thanks to the lockdown for a second time. Service-based businesses like hairdressers, pubs, and more, which account for 75% of the UK economy, were badly affected, says the survey, and it is 9.9% below the level of February 2020.
Another report has revealed that 6m small businesses are struggling to ride out the damaging impact of the pandemic. Findings by King’s Business School study done in the last year revealed that over 60% of entrepreneurs surveyed reported that their businesses were going downhill.
Seeing a huge turnover loss and its bad impact on the entire economy, the UK government proposed various funding schemes to fuel small businesses. There are multiple types of small business loans, and each of them can help you grow. However, you must consider several factors before using them.
Determine which funding source suits you
Although each type of loan aims to supply you with cash to keep the ball rolling, they all work differently. Take a look at them:
Coronavirus business bounce back loans
Coronavirus business bounce back loans have come up like knights in the shining armor for those struggling due to the pandemic. You can borrow between £5,000 and £50,000 under this scheme. These loans can fund small and medium-sized businesses.
However, government-backed bounce back loans are no longer available, and still many people have crossed the due date and could not qualify for the scheme because of the following conditions:
- Your business must not be facing trouble on December 31, 2019.
- You have evidence to prove that you had been running your business before March 1, 2020.
- Your business has been negatively affected due to the pandemic.
- You have not already been approved for the coronavirus business interruption loan scheme.
Here direct lenders come in. If you need money but could not fit in the scheme, you should seek help from online lenders. Various online lenders are offering bounce back loans, and the best thing is that there is no restriction on the minimum borrowed amount. You can put in the application even if you need less than £5,000.
New business loans
Having spent months in lockdown and fallen demand for millions of products, the current phase does not seem to be optimistic if you are looking to start your own business. You have already dipped into the savings that you had built for your business.
Here new business loans come in. As the name suggests, online lenders offer business loans to those who want to start their businesses. You will have to meet the following conditions:
- You can qualify for these loans if you are starting your business in Wales, Scotland, and England.
- You should have a plan to take your business far.
- You must be living in the UK for at least seven years.
Working capital loans
Working capital loans are ideal for those businesses struggling to hit the ground running because of disrupted cash flow. These loans are not suitable for new businesses. From funding short-term investments to paying off debts, you can use these loans for a wide variety of reasons. You will have to meet the following conditions to apply for these loans:
- You should have a minimum turnover of £100,000.
- You should have your own house
- You should not have any previous debts to pay off.
Under the working capital loan scheme, you can borrow up to £250,000. However, you will have to secure the loan if you are borrowing over £150,000.
Unsecured business loans
If you have already been running a business and need money for the reason that does not fit in the working capital loan scheme, you should consider applying for unsecured business loans. You cannot borrow more than £100,000 and less than £5,000. These loans are also suitable for start-ups that do not require huge capital.
Research the market
No matter which type of funding source you seek, you should research the market properly to ensure that you get the deal at best interest rates. Undoubtedly, government-backed loans outweigh all funding sources from financial institutions, including banks, but when you have no longer this option, find out which market lenders can fund your needs.
- Online lenders can make the application process easy and convenient. You can get funds directly into your bank account after submitting the documents online.
- Banks can offer you loans too, but the processing will be slow. Further, they will not entertain bad credit borrowers.
- Peer-to-peer lending sites are also an option, but they can lend only small money.
Analyze the market properly and choose the right alternative.
Lower down your risk profile
Even though you need a small amount of money for your business, lenders will take a comprehensive look of your credit file to see your previous payment records. This will help them analyze if you fulfill your financial obligations. However, the credit score is not the only factor that a lender will consider to check your affordability. Here is how lenders will monitor your risk profile:
- Outstanding loans
Even though you take out a secured business loan, a lender will always be skeptical about your repayments. Chances are they will turn down your application.
When you apply for any of the business funding sources, you should avoid having an outstanding loan. Your credit card bills can also keep you from qualifying for these loans.
- Business assets
Lenders will monitor the value of assets your business owns. They generally emphasize accounts receivables and cash. It serves as a basis for deciding if it is safe to lend you money.
Assets reflect the true financial picture of a business. The purpose is to check the health of your business.
- Growth plan
If you are looking to borrow money to fund a start-up, lenders would like to review your business plan. They will be interested in knowing the strategies you would use to generate revenues.
Apart from this, they would like to know a backup if your strategy fails to derive output. Getting a loan for a start-up is much harder than an established business. Make sure that you have an impactful business plan.
- Experience
Unless it is a start-up, lenders will consider how long you have been operating for your business. The longer, the better, but it cannot support you if your financial statements do not reflect steady growth. It is crucial to be a consistent performer.
Have an answer to why and how much
A lender would like to know how much you want to borrow and why you want it. Do you need it to expand your business or you want it to cover the shortfall in working capital?
Make sure that you have answers to all questions. Without such information, you can either reject or tying yourself up with a deal that does not suit your purpose.
Take a comprehensive view
Although a lender will check your affordability, you are completely responsible for ensuring the proposed loans work in your favour. This is why you should analyze the following key terms beforehand:
- What are interest rates? Are they fixed throughout the tenure?
- What is the loan processing fee?
- What if you skip a payment?
- What if you fail to pay off the loan?
- How will the guarantor or collateral work?
- Is there any prepayment penalty?
Have all your documents ready
Since a lender will carefully review all financial documents, make sure that you have all of them. Apart from financial statements, you should have tax returns, bank statements, franchise agreements if you have a franchise business, and cash flow statements.
The lender will monitor all these statements to evaluate the debt-to-equity ratio, gross profits, net profits, accounts receivables, accounts payable, and much more. The lender can also ask you some questions about your current and future business position, so be prepared to answer them.
Lenders are usually keen to know how your business will likely grow down the line to ensure they are not slipping up lending money to someone who cannot pay off the debt.
The bottom line
There are various types of business loans, and all of them are aimed at fulfilling different needs. Whether you are looking to apply for short-term business loans or business bounce back loans, make sure that it is the right type of deal to meet your business needs.
For example, if you need money to buy machinery, unsecured business loans can be a more suitable option than working capital business loans.
Further, you need to analyze that you can pay back the money you are borrowing. Regardless of the type, business loans can be expensive. Take a comprehensive view of your financial position to make a decision.