Business Loan Process & Criteria
Learn more about the business loan application process and lender criteria
When looking to take out a business loan, it’s important that you fully understand the process and lender criteria to give yourself the best chance of success.
In this guide, we break down both the process, likely lending criteria and how to get further support from our experts, if needed.
Read on to learn more about the process and lender criteria, or head over to our guides for more information.
The Process
The steps you must take to apply for a business loan may initially seem daunting but don’t worry – our team are here to guide you through the whole process.
| 1 | Enquire online or call us on 01922 620008 for a no-obligation conversation with a business loan adviser who will discuss your requirements and the available funding types. |
| 2 | We will send out written terms, outlining the most suitable product and any interest rates and charges associated with the product. |
| 3 | We will talk through the terms to ensure you understand the product fully and help you fill out any required forms. We will then fully submit your application to the chosen lender on your behalf. |
| 4 | Once this is done, we manage the application through to completion for you, ensuring the funds are safely deposited in your bank account. |
All lenders work to different criteria, so giving a set of standard terms is impossible. They do, however, tend to look at very similar factors in assessing loan amounts and pricing. The most common areas of assessment for business loans are:
- Accounting information (turnover and net profit)
- Affordability (loan amount and repayments compared to profit)
- Bank statements and account conduct
- Credit history
- The effect of the loan on the business
Below, we will look at each of these areas individually to highlight what information this provides to the lender:
Accounting information
Firstly, a lender will look at turnover and profit. The turnover and net profit shown in the accounts are the main indicators of affordability of the loan you have requested.
Certain lenders will make the assessment purely on the headlines of the accounts; however, most will look into the situation deeper.
Each lenders approach to assessing accounts differs, with some using a computerised/algorithmic approach – and others assessing them manually as part of a human underwrite.
Affordability
Sometimes a business has previously struggled but is either turning around, or a cash injection will stabilise the situation. In cases like this, there will be an assessment around the likelihood of how the cash injection will help the business and the risk involved.
On top of this, there may be other expenses in the accounts that are no longer relevant, such as one-off costs, or payments that have ceased. In this situation, certain adjustments are made to the profit to produce a more realistic figure.
Ultimately, affordability is calculated as a percentage of either the net profit, or adjusted net profit of the business. Adjusted net profit is the net profit, plus any ‘addbacks’ that aren’t a relevant expense going forward.
A good example of an addback would be the one-off purchase of a new asset for the business that will serve the business well for years to come.
Bank statements & account conduct
A lender will generally request your last 3-6 months business bank statements. By checking the statements, they will be given a good picture of the cash flow of the business.
Account conduct will be an important factor here – any missed payments or returned items could count against you with certain lenders.
Credit history
Business loan lenders will generally use your credit history as a guide to the likelihood of repaying the loan without issue. A judgement call will often be used, with adverse credit not necessarily meaning a business loan is ruled out, although it could increase the interest rate slightly. In this situation, a bad credit business loan is used.
Recent or ongoing credit problems are likely to be judged more harshly than an isolated issue or problems in the past.
Where the applicant has a history of adverse credit, a secured business loan application will be more likely to be approved than an unsecured one.
The effect of the loan on the business
On top of these areas, a lender will consider how the loan will affect the business. If your business needs a business loan to fund a vat bill, then troubles on bank statements are more likely to be overlooked.
A lender will judge an application on the situation as a whole, and a problem in a single area (or even a few areas) does not mean that you are not eligible. A reputable adviser will be able to tell you quickly what options are available to you, regardless of past issues.