Need a small business loan? How to successfully apply for one

If your company is ready to take a leap, you may need a business loan to make it happen.

There are numerous reasons why your business might need extra funds. Perhaps you’re looking to expand your operations and you need new equipment. Maybe you need more inventory to fulfil a big order.

Or perhaps your business is in a bit of a tight spot and you need the extra funds to ensure you can cover payroll.

No matter the option, getting a business loan is one approach to consider when it comes to sourcing funds for your company.

But how much are you going to borrow, who are you going to borrow from, and what type of loan are you going to apply for?

These are just some of the myriad of questions you need to ask before taking the next step.

This article outlines the key points you need to consider when applying for a business loan and covers the following topics:

Do you need a loan?

Grant versus a loan?

Where can you source a loan?

Is a credit score important?

How much can you borrow?

How long will the loan term be?

What documentation do you typically need?

Should you get professional advice?

Do you need a loan?

Do you actually need a loan? Managing director of finance broker, BusinessLoans.ie, Rupert Hogan, says as a general rule of thumb it’s better to be over-capitalised than under-capitalised and it is wise to have a buffer of working capital to help you during difficult times.

Also, as most loans do not have early repayment penalties, you can settle the outstanding balance when you feel the time is right and save on the interest you would have paid had you let the loan run to full term.

You also need to be clear about the reason for the loan.

Are you a start-up or do you want help with your everyday expenses or do you want to grow your business?

Depending on your answer, it will mean different funding options.

Grant versus a loan?

First things first. Before committing yourself to a loan and repayments, you should consider whether your business would be eligible for a grant.

But what’s the difference?

With a grant, you don’t need to pay it back (you do, however, need to meet the terms and conditions for obtaining it). However, if it’s applied for under false pretences, you’d need to pay the money back.

With a loan, you do have to pay the funds back, often with interest added.

In terms of getting a grant, a good place to check out what’s available would be Enterprise Ireland, for a business with an export angle, or try your Local Enterprise Office (LEO).

Where can you source a loan?

There has been a seismic change in recent years in terms of the range of funding available to SMEs in Ireland.

In the past, most funding was provided by the pillar banks. However, today the landscape is quite different.

Data published by the Central Bank in April 2021 shows that Irish small and medium-sized enterprises (SMEs) borrowed almost €4bn from non-bank lenders between 2019 and 2020.

The equivalent figure for banks is almost €10bn.

And the Central Bank points out that non-bank lenders increase choice for borrowers, boost competition for banks, improve financing in market segments underserved by other lenders and drive innovations in products and funding models.

Also, the government-backed loan scheme, the COVID-19 Credit Guarantee Scheme (CCGS), now has non-bank lenders on its books, whereas originally it was only the three pillar banks – Allied Irish Banks, Bank of Ireland and Ulster Bank – that had access to the funds.

Banks

Why choose a bank?

They tend to offer lower interest rates. In addition, you may have built up a good relationship with your bank manager and this could smooth the application process.

On the other hand, banks tend to be slower and more bureaucratic to deal with in comparison with many of the high-tech non-bank providers and banks generally also have higher loan approval requirements.

Hogan says: “Banks have access to a range of unsecured and secured lending options currently.

“You can seek loan approval under their usual business loans or options they have in partnership with the Strategic Banking Corporation of Ireland (SBCI). SMEs can expect good rates, especially for start-up loans and early-stage businesses.

“There are frustrations with the turnaround times for decisions, as well attending to requests for reams of documents. This can be expensive and time-consuming.”

Non-banks

Non-banks generally have fewer requirements than banks and also have access to funds from the SBCI and CCGS.

The Central Bank said there were 63 non-bank organisations providing loans to Irish SMEs in 2019 and 2020. The lenders are diverse, and include many small lenders and also specialist lenders, providing specific types of loans or loans to specific types of borrowers.

Peer-to-peer lending is also included in this cohort, the most well known in Ireland being Linked Finance.

Hogan says: “Peer-to-peer lenders are also willing to support SMEs through crowdfunding.

“There are two primary types.

“Firstly, debt crowdfunding for everyday businesses in need of working capital loans and secondly, equity crowdfunding that suits innovation-driven enterprises that need a significant amount of funds before they are income producing.”

Other notable lending tools include invoice discounting (using your unpaid debtors invoices as a collateral for a loan) and trade financing (securing financing for goods or services in a trade or transaction).

Local Enterprise Office

However, the first port of call should be your Local Enterprise Office (LEO). They can give you advice and also have access to funds from Microfinance Ireland, which gives loans of up to €25,000, with six months interest-free.

Also, if you apply through LEO, you get a lower interest rate of 4.5%.

Is a credit score important?

Credit scores are a factor in most lending decisions, but especially for unsecured loans.

Hogan says: “Underwriting teams will be looking out for things like recent unsatisfied judgements [judgement made against a person that has not paid back a debt].

“In secured lending, it’s not as important as the lender has collateral of an asset that can be used to repay a loan, if an agreement is breached.”

You can check your credit score with the Central Bank’s Central Credit Register.

How much can you borrow?

For unsecured lending, the key question in terms of how much you can borrow is whether you can afford the repayments. This will be ascertained from your recent bank statement history.

Hogan says: “If the lender, looking at your bank statement history, sees that you can afford the proposed repayment amount and it won’t bounce, then the rule of thumb is the loan application will pass.

“Different credit teams will have variations, but the affordability test is key.”

How long will the loan term be?

“Generally, lenders will offer loans from six to 60 months, depending on the purpose of the funds,” says Hogan.

“For example, if it’s for stock, it may only be a 12-month term, but if it’s for capital expenditure, it may extend to 60 months.

“Your documents will be reviewed and are sometimes graded for risk, from an ‘A’ grade down to an ‘E’ grade.

“It’s usually a fixed repayment. Early in the loan period, repayments will be made up mainly of interest. As the balance reduces over time, more of the repayment will go to reducing the balance.”

What documentation do you typically need?

Hogan says: “For a simple unsecured loan, you can expect the lender to want to see recent accounts, six-month bank statements and your latest tax clearance certificate.

“If financing involves your debtors, lenders will ask for the aged debtors and creditors reports.

“If you’re applying for a loan based on your assets, the lender will want a list of assets with accompanying information. Underwriting teams can sometimes also make further requests.”

He also points out that how you operate your bank account can affect your loan application.

He advises, if possible, to keep a minimum level of funds in your account. In addition, having overdraft approval is seen as a positive by lenders, as it can help ensure loan repayments won’t bounce if there are times when cash flow is tight.

Should you get professional advice?

Firstly, you should get multiple quotes from a broad spectrum of lenders and to help with this, you could use a finance broker such as BusinessLoans.ie. It would also be advisable to discuss the potential loan with your accountant or financial adviser, as they should have a good feel for your business.

Final thoughts

There are numerous funding sources out there, but you need to do your research before taking the plunge.

It’s about aligning the options to your business.

Getting a business loan may sound straight forward, until you realise how many types of loans exist. So don’t short change your business, by not doing the research beforehand.

And before you go ahead and sign on the dotted line, ensure you have the ways and means to pay the loan back by the required time (and before it if possible to save on the interest). Doing your due diligence will pay dividends in the long run.