How to get a bank loan for your startup
For many businesses starting out, especially ones that have equity that can be borrowed against (such as a house), a bank loan might seem like a logical option. We use banks every day, and you might already have an existing relationship with the bank – whether that’s an account, a credit card, or both. However, banks are strict about lending to startups. Here’s our guide to bank loans, whether they’re right for you, and how to get one.
What is a bank loan?
A bank loan is credit that you borrow over a fixed amount of time from the bank. Loans can be secured or unsecured – if secured, you’re borrowing against something you own, such as a house. You’ll also normally have to pay interest on the loan, bringing up the total cost. The interest rate might be fixed (the same throughout the loan) or variable (changing with either the Bank of England base rate, or the bank’s cost of borrowing.)
- You retain equity in your company, and the bank doesn’t have a say in how it’s run
- If you have equity tied up in something such as a house, you can borrow against it
- You’re guaranteed the money for the whole term – unlike an overdraft, it can’t be recalled at any time
- If your loan is secured against something such as your house, failure to make the payments could see you lose your home
- Banks are often reluctant to lend to startups
- Fixed monthly payments mean that, when cashflow is uncertain, you might struggle to pay the bank
- Loans aren’t flexible – if you want to pay it back early, you might find yourself facing charges
- If the variable rate of interest changes, it can make it hard to plan out your finances
If you do decide that a bank loan is right for you, here’s how to give yourself the best chance of winning a bank loan.
Know what you want
When applying for a bank loan, think very carefully about what you want the money for, and about what kind of terms work for you and your business. Will the money be used for a specific project, to expand your existing shop, to get producing a product or range, or to build your business from the ground up? How quickly are you going to be able to pay the money back – will you start making a bigger profit immediately, or can you cover the costs of repayment already and just need a lump sum? Don’t forget to factor in interest repayments and their cost.
You might have been with the same bank for years, but that doesn’t mean that you should automatically choose them to provide your business loan. Don’t be afraid to shop around and find the best deals for you. Look at what every bank has to offer you – whether that’s fixed interest rate, repayment holidays, no charges for paying back early. Every bank offers something different, and some offers will be better than others.
An amazing business plan is instrumental if you’re to win funding from the bank. Make it as detailed as you possibly can – talk about market research, your team, how you’ve validated your idea, your sales track record if available, and the support of any advisors or investors who are onboard.
Ensure you provide as much information as possible about how the money will be used. As many costs as possible should be accounted for – show that you’ve really done your homework, know exactly where each bit of the funding will go, and that you definitely need the full amount. Look as well at how much money you will be making to prove you will be able to meet the loan demands. In creating such a comprehensive financial forecast, you’ll also hopefully bring any roadblocks to light – you might even find you need less money than you realise.
Credit check, and other documents
Basically, you want to show the bank that you’ve covered every avenue and have got everything hyper-organised. The business plan is part of this, but make sure you also do a credit check before approaching the bank, as they’ll ask to see it anyway and it speeds things up. Sites such as Experian can give you a free assessment. Knowing your credit score can also help prepare you for any questions the banks might ask about your credit history.
Before making your pitch to the bank, ask questions about what they need to see from you and make sure you have all this beforehand as one package – this means you’re not left floundering if they ask for something unexpected, and speeds up the process.
When you’ve got your business plan perfect and any necessary documents in order, it’s time to submit your pitch. Your pitch should demonstrate your enthusiasm and passion for your business, outline your prospects for growth and how the loan will help you achieve this, and assure the bank that you’ll be able to make the repayments.
Reasons for being rejected
- You’ve had financial trouble in the past. Poor credit, missed repayments, bankruptcies – all of these are things that the bank can turn you down for
- Unrealistic projections. If the figures don’t add up or the bank doesn’t have confidence in your ability to turn sufficient profit, you can be turned down.
- You don’t have a credit history. If you haven’t borrowed anything before, this can actually count against you as there is no record of you paying debts off diligently.
- Mistakes. Contradictions with personal information, such as a name change, or not being on the electoral roles can see you turned down – ensure all your information is up to date.
What to do if you’re rejected
If you’re turned down for a bank loan, don’t worry – this is a position that many small business owners find themselves in, especially at the early stage. There are other funding options available to businesses that can help you get off the ground and develop a proven track record, which can then be used to gain additional funding. Options include crowdfunding, angel investment, or startup loans (hello!)