In this article, we explore the best practices when applying for a business loan.

This includes understanding the reasons why you might need to get a business loan, deciding how much to borrow, how you can ensure the borrowing is affordable for your business, best practices for putting your application together, how the application process works, and how lenders will judge your application.

Reasons why you need to get a business loan

Traditionally, finance fuels growth by allowing businesses to invest in assets, people and systems to improve their future profitability.

Oftentimes, businesses lack the upfront cash they need to stimulate growth. This is when a business loan can be a useful tool.

These are some of the common reasons we lend to businesses:

  • restructuring of operations
  • growing teams or upskilling existing teams
  • technology investments
  • product development
  • launching into new markets
  • purchasing equipment
  • new customer acquisitions

Any reason to grow or sustain your business is a reason why you may need to get a business loan. 


Defining how much to borrow

Before you apply to get a business loan, you’ll need to be able to articulate why you need the funding, how the loan will be spent to support the business, and how it will impact the business in the long term.

Deciding how much you need to borrow can be a challenge. Understanding your obstacles to growth will be key to defining your needs and we would recommend being as specific as possible.

For example, if you need to invest in assets to accelerate growth, research the costs of any equipment you need. Alongside that, consider what additional costs will crop up, such as associated costs of operating at increased capacity. Will you need more staff? Will your utility bills increase? You’ll also need to consider if there are any additional costs that are specific to your sector. Once you reach your borrowing figure, add a small contingency.

The takeaway tip here is to be as realistic with the costs as you can – this will go a long way in helping you to get a business loan by showing lenders that your need is credible.

Determining affordability

Once you’ve determined how much money you will need, take some time to examine if the loan amount is realistic and affordable for your business.

A handy behind-the-scenes calculation that lenders typically use to assess affordability is debt service coverage (DSC). This calculation totals what money is left in the business to make debt repayments annually.

Calculations do vary between lenders, but the most basic formula would be:
Profit before tax / total of 12 months loan repayments

As an example, if your business makes £50,000 profit per annum, your annual repayments should not exceed this figure. If your annual repayments do exceed this, can you structure the loan over a longer term to reduce the payments? Lower repayments will reduce the financial strain on your business and increase the likelihood of you getting a business loan.

While the DSC ratio helps you understand if you’re in the right ballpark, do not get too hung up on this. As we mentioned, some lenders will have a minimum figure for DSC, and this will vary between lenders, sectors and size of the business or loan facility.

We would recommend discussing this with your lender ahead of your application – most lenders are happy to have an open affordability conversation with you.

Putting together your loan application

The majority of delays we see are caused by incomplete documentation. To strengthen your application, have the relevant information ready in advance.

A good starting point would be;

  • Last 2 sets of full annual accounts, including detailed Profit & Loss Accounts
  • Management accounts for the period since the most recent year-end to date
  • Cashflow forecast for a minimum of 18 months, identifying the loan requirement
  • Agreement to Open Banking report
  • Credit Report for all directors
  • Business plan / executive summary overview
  • Details of any agreed outputs e.g. number of jobs safeguarded or created

Lending decisions are based on trust. Whilst it may seem appealing to conceal any negative impacting factors to a lender, this is counterintuitive. We recommend being upfront and honest with the lender, should there be any irregularities in your financials or any challenges the business has faced.


How lenders will judge your application

Here are a few critical factors that lenders will be considering:

  • Stability and Profitability – the business’ track record.
  • The impact – generated by the funding.
  • Serviceability – how many times your annual operating profit can make annual repayment totals.
  • Creditworthiness – don’t forget to check your own credit report to avoid any surprises.
  • Management team – A high-quality and credible management team who are capable of leading the business through transitional phases.
  • Forecasted performance – showing strong improvement compared to previous years.
  • A strong pipeline – reflecting their future opportunities and contracts.

What to expect from the process

The application process varies between lenders. The length of time between application and drawdown of funds depends greatly on the complexity of your case.

To expedite the process, ensure that you respond promptly to any request for further information, and be cooperative with any queries that arise.

If your application is declined, ask why – and remember that just because one lender has said no, doesn’t mean you can’t get the funding elsewhere. Finding out why your application was declined will help you to understand your weaknesses through the eyes of a lender and help you prepare for future applications.

How Does SWIG Finance Support SMEs?

Traditional lenders will assess businesses on historical performance. For growing businesses, this is often far from where they are now or where they are heading. These businesses may need to opt for a lender who can base their decisions on projection-led assumptions.

Because CDFIs, like SWIG Finance, judge each business on its current merit and future opportunities, it means that we can lend to projection-led businesses that demonstrate a forecasted performance showing strong improvement compared to previous years.

Choosing a CDFI as your lender means that you’ll be assigned a dedicated business manager who understands the local markets and will provide hands-on support and guidance throughout the application process and for the duration of the loan.


Final Words

At SWIG Finance, we understand that navigating your pathway to growth isn’t always straightforward and there are a number of financial products out there that all serve different purposes.

Your bank, local growth hub or finance broker can give you further advice on which type of finance is right for your business.

Online directories such as British Business Bank’s Finance Hub include in-depth information on the types of finance available and how they can help you to grow your business.

Our lending team is always on hand to discuss your debt finance needs. For more information, please visit our Business Loans page.

About SWIG Finance

SWIG Finance is a non-profit company that supports viable South West businesses that can’t secure sufficient funding from their bank. By empowering underserved SMEs to overcome their financial barriers, we are working to create a more balanced financial ecosystem.

We’re growing every year. In 2021/22, we lent £10.8m to 502 businesses, helping to create and secure over 1,000 jobs and generate £32.3m. For more information please download our Impact Report.

If you’d like an informal chat about your funding requirements, get in touch with our friendly and professional team to see how we can help: / 01872 227 930.