Business lending guide
A complete guide to business lending
Need a cash injection to buy new stock or equipment? Or perhaps you’re looking to fund an expansion? Business lending can help your business grow and thrive. We take a closer look at the different borrowing options open to businesses and the application process.
With so many lending options available it’s important to find the right one for your business’s needs. Lenders can’t advise you on which product to take, but they can help you make an informed choice by exploring why you need funds, how much you’d like to borrow and what period you’d like to pay it back over. Some of the most common lending options include Business Loans, Business Overdrafts, Invoice Finance and Asset Finance.
“Understanding the options can help you make a more informed choice about your business borrowing. Sometimes people have only considered loans, as they’re a familiar option, but discussing the details with your bank or using our product selector tool could present another product more suited to your need.”
Rudy Luchun, Product Manager, Bank of Scotland.
In a nutshell
Probably the most common form of business funding, loans involve borrowing a lump sum and paying it back regularly over a set period.
Businesses can choose from a Fixed-Rate Loan – which has the same rate of interest for its full term – and Base Rate Loans, which can see their interest rates go up or down over the loan period, depending on the Bank of England Bank Rate. Base Rate Loans can typically be taken out over a longer loan term.
Both types of loan can be taken out on a secured or unsecured basis. Secured loans use an asset as security. If you don’t pay back the loan, your lender can sell the asset to recoup their money. Unsecured loans don’t require assets as security.
- Can be very flexible – business loans can be taken out for varying amounts and over various time periods, depending on your needs.
- Suitable for funding a wide range of things, from buying new stock and equipment to moving premises or taking on new staff.
- Regular repayments over a set period help with budgeting.
Be aware that…
- Some loans come with arrangement, security and valuation charges and/or early repayment costs. It’s important you understand all terms and conditions before taking out a loan.
- Base Rate Loans are dependent on market conditions as they vary in line with the Bank of England Bank Rate, this means that monthly payments may fluctuate.
In a nutshell
A Business Overdraft is a line of credit linked to your business bank account which allows you to maintain cash flow to make payments and take advantage of opportunities (up to your agreed limit) when you don’t have sufficient funds in your account.
Typically, they’re used for things like paying employees, buying stock and settling invoices.
Business Overdrafts can be granted on a secured or unsecured basis. Secured overdrafts use assets such as property as security, which your lender can sell if you’re unable to repay your overdraft.
- Flexible lending - you’ll only pay interest on the funds you use. Small limit overdrafts typically don’t have any fees.
- You can apply for a limit that suits your business needs.
- You can continue to make payments even if you don’t have available funds (up to your agreed limit) without payments being stopped.
Be aware that…
- Depending on your overdraft limit there will be usage fees or annual fees, and there could also be security or valuation charges.
- Overdrafts are repayable on demand and aren’t suitable for long-term borrowing.
- Overdraft rates are linked to the Bank of England Bank Rate which means the rate will go up or down if the Bank Rate changes.
In a nutshell
If you trade business to business and invoice in arrears, Invoice Finance can help you unlock income tied up in outstanding invoices. The cash can be used to pay employees and suppliers or be invested in business development and growth.
There are several ways Invoice Finance can be structured, including:
- Factoring – provides earlier access to incoming payments for products or services provided. A percentage of the value of an invoice will be released to you upfront, then once the invoice has been settled, the remaining funds will be made available, minus a small fee. Factoring is a disclosed facility, meaning your customers will be aware you are using the service, and it comes with optional credit control support.
- Invoice Discounting – works exactly the same way as Factoring, however this is an undisclosed facility meaning your customers will not be aware you’re using the service. With this option the credit control remains with you and having robust processes in place will be a requirement.
- Asset-Based Lending – builds on Invoice Discounting and allows you to strengthen your cash flow further by releasing cash against other balance sheet assets such as plant, machinery, property and stock.
- Debtor Protection – is a low-cost, easy to manage facility that can protect up to 90% of the value of your invoices if customers fail to pay. At Bank of Scotland Debtor Protection is only available as part of an Invoice Finance facility.
- Instant access to cash to help strengthen cash flow.
- Increased flexibility and headroom between paying your bills and suppliers.
- You can use funds to develop new products, target new markets or finance acquisitions.
Be aware that…
- Your annual turnover will need to meet a certain threshold to be eligible for Invoice Finance. At Bank of Scotland, projected turnover needs to be £50,000+ per annum for all forms of Invoice Finance.
In a nutshell
Asset Finance allows businesses to pay for essential equipment or machinery in instalments rather than paying the full amount upfront.
The two most common types of asset finance are:
- Hire Purchase – The cost of the asset is spread over an agreed term, followed by a one-off purchase fee which transfers full ownership to you.
- Finance Lease – Your lender purchases the asset on your behalf and rents it to you for an agreed term. When the asset is sold at the end of the rental period, the business receives a proportion of the sale proceeds.
- Allows businesses to invest without impacting their working capital.
- Helps fund new equipment which can help businesses maintain their productivity and competitiveness.
Be aware that…
- Any assets purchased must be for business use.
- Your annual turnover may have to meet a certain threshold in order to qualify.
Credit scores and eligibility
Typically, banks will use one of the main credit score checkers like Experian or Equifax and your business will be given a score out of 999.
Factors that can impact a business’s credit score include:
- Company size
- Trading history
- Any debt attached to the company
- Industry-specific risk factors
As well as looking at the business’s credit history, lenders will usually also run personal credit checks on any key people involved in the business, for example any company directors. This is especially important for start-ups, which haven’t had time to establish their own credit history, or sole traders.
As well as credit scores, there are other factors that lenders consider when deciding a borrower’s eligibility. For example, for limited companies they might look at information held at Companies House to see if businesses have been reporting their accounts on time.
They may also ask if you are up to date on all your tax liabilities, because late payment of taxes or incorrect filing can result in credit being rejected.
If you are looking to borrow from your existing bank, they may also look at how your current account is run. Are you using your overdraft regularly? Does the amount coming into your account match your turnover projections?
While having a good credit score can make it easier to access lending, there are other factors that come into play too and most lenders, including Bank of Scotland, will consider all applications on a case-by-case basis.
Businesses without a good credit track record could consider routes such as invoice finance or take out a secured loan against business or personal assets.
Similarly, having a good credit history is not a 100% guarantee of a loan. Lenders will also be looking at how sound your business plan is and whether you have a viable proposition.
Ways to apply for business lending
There are three main ways to apply for business lending; online, by phone or in branch. Which one you choose will depend on the type of borrowing you are applying for. For example, an application for a basic loan under £25,000 could easily be completed online. However, for larger sums it’s advisable to go through the process with someone, either on the phone or in person.
Whichever way you decide to apply for lending, the process and information you’re asked for will be almost identical. It’s recommended to set aside a block of time to complete your application, as how long it takes can vary depending on the complexity of your requirements.
The channel you use won’t affect the speed of the approval process.
What does your bank need from you?
As part of the lending application process you’ll be asked to provide various pieces of information to support your application. Exactly what is required will vary depending on the amount you are looking to borrow and your individual circumstances, for example whether you are an existing bank customer, but could include:
- Details of your financial accounts
- Business bank statements
- Personal bank statements
- Tax returns
- A business plan
- Cash flow forecasts
In addition, you’ll also be taken through an affordability assessment which will look at both your business and personal finances. You’ll need to include details of any business and personal assets, including properties, equipment, stock, vehicles and savings, and liabilities including any mortgages on business properties or homes, credit cards, loans and hire purchase agreements.
In terms of incomings you’ll be asked for details of turnover, your income from your business and any other sources of earnings, including your partner’s salary and any benefits you receive.
You’ll also need to provide details of your monthly business and household expenditure, including utilities, loan repayments, mortgage or rent, insurance, staff wages, taxes, childcare and clothing, hobbies and leisure.
It may seem like a lot of information, but it’s vital in helping lenders build a picture of both your business and personal finances so they can make an informed decision about your application.
Once you have decided on the right lending product the application can be submitted.
Depending on the product selected, the loan value, and your personal circumstances, the application could be approved automatically or need to be sent to the Credit Sanctioning team for further review.
In some cases we will require you to sign and return the application – this can now be completed via our e-signature journey.
For those eligible for automatic approval, overdrafts applied for online and up to £25,000 can be completed and available within 5-10 minutes. For online loan applications up to £25,000 funds could be transferred to your account within 3.5 hours.
What can cause approvals to be delayed?
For larger loans or more complex applications, the time taken from application to approval can take longer.
If you are applying for a secured loan, whether that’s using the Enterprise Finance Guarantee Scheme, a Director’s Guarantee or physical security like a commercial property or machinery, it can cause delays in borrowing.
The Enterprise Finance Guarantee Scheme enables small businesses with a workable business proposal, but without sufficient security to borrow money from approved lenders, including Bank of Scotland. The scheme provides the lender with a government-backed 75% guarantee against the outstanding facility balance.
Director’s Guarantees mean that a company’s director will be personally liable for the debt if the business can’t repay its loan. These require special documentation which needs to be signed and witnessed and then submitted for a separate approval process. This can take between five and seven days.
If you are using physical security, the process can take several weeks as the assets you are using need to be valued.
Please note that Coronavirus Business Interruption Loan Scheme’ (CBILS) has temporarily replaced the Enterprise Finance Guarantee (EFG).
Giving your application the best chance of success
When applying for finance, your business is in a stronger position if it can demonstrate:
- A good financial track record
- Sound management of your business
- A business idea expressed in a well-researched, well-presented business plan
- Financial controls and expert support
- Personal commitment from principal shareholders
- Financial security
Thinking about borrowing for your business?
See how likely you are to get approved for a business loan, without it affecting your credit rating, using our loan calculator.
ANY PROPERTY GIVEN AS SECURITY, WHICH MAY INCLUDE YOUR HOME, MAY BE REPOSSESSED IF YOU DO NOT KEEP UP REPAYMENTS ON YOUR MORTGAGE OR OTHER DEBTS SECURED ON IT.
All lending is subject to a satisfactory credit assessment.
While all reasonable care has been taken to ensure that the information provided is correct, no liability is accepted by Bank of Scotland for any loss or damage caused to any person relying on any statement or omission. This is for information only and should not be relied upon as offering advice for any set of circumstances. Specific advice should always be sought in each instance.