Are small business loans hard to get?

Are small business loans hard to get? | The Small Business Question Blog

Deciding to take the jump and start your small business can be an exhilarating experience. It can also be utterly terrifying when you suddenly think: how can I finance this? That inevitably leads to the question should I get a small business loan to cover expenses, and how hard is that to do?

Believe it or not, government-backed small business grants aren’t particularly hard to get, but a small business loan from a traditional bank might be. It all depends on your current financial situation and the strength of your business plan. It’s also a lot to do with the current economic climate. There are many factors that are out of your control, but there are things you can do to improve your chances of being accepted.

money on a bench

Getting your finances straight

Before jumping right in, there are a few caveats I’d like to put in place. Firstly, I am not a financial advisor at all. If you are thinking of getting a business loan or using one of the other funding options available, I would suggest it’s a good idea to have a discussion with a qualified person. Your bookkeeper, accountant, or tax advisor would be a good place to start.

You’ll need to make sure your finances are secure before you consider getting funding. 

  • Can you show that your business is viable? 
  • Can you show what you will use the money for is well thought out and actionable? What are your KPIs (Key Performance Indicators)? 
  • How good have you been with money in the past? 
  • Have you got a history of bad credit? 
  • Are you going into business with someone, a friend, partner, or family member maybe? 
  • What does their financial situation look like? 

These questions may seem invasive but you will need to be comfortable answering them for your loan or grant application to have any chance of being successful.

When should I think about getting some funding?

It’s easy as a business owner to think “oh great, with a loan or grant I can get everything I need!”. Whilst this is a lovely idea, it’s worth being a bit conservative with your plans. It all depends on your small business, the type of funding you decide to go for, and the role your small business will play on your personal financial situation.

If you are currently in full-time employment and have a side business, do you need funding? Can you save from your salary to expand your business? If you can it might work out better for you to do that instead. If you’re looking to leave full-time employment and work for yourself as a sole trader, there might be a need for an initial cash-injection to start your business. Be that to buy stock, equipment, do renovations to a property, etc.

Funding is a hugely important part of running a successful small business. You do need to have a clear vision of how you’re going to use those funds, however. If you suddenly had £25,000 in the bank to spend on your business, what would be the most sensible and cost-effective use of that money? If you were a photographer, it might be worth investing in advertising or a show-stand set up. It might not be worth investing in better and better lenses (even though you REALLY want that Sigma Art lens that’s £5000, I know, I’ve been there!). 

You must be able to show how the funding you are applying for will be used sensibly within your business and used to provide a return to the business.


A small business loan or a grant? What’s the difference?

When you begin looking at the funding options, it all seems a bit confusing! The difference between a loan and a grant is whether or not you are required to pay the money back. With a grant is, for the most part, you are not required to pay it back.

A government-backed grant is (usually) non-repayable and you won’t be giving up any equity in your business or be liable for the interest. This can sound like a fantastic option, but government-backed grants can be really hard to get. The process takes a long time, have very specific requirements, and it can be very competitive too. 

If you can spare the time and the stress, it might be worth it. Check out the government’s own finance finding website here to see what’s available for you.

Loans, on the other hand, are repayable, and it’s something you’ll need to factor into your finances. The bonus with a loan, however, is that there are more options and they are certainly easier to get!

Generally, small business loans can range from £500 right up to £500,000 and they are not limited to new businesses. So, if your business is a few years old and you’d like to scale up, a business loan may be a lot easier to get and a better option for you than a grant.

Can I get a small business loan or a grant if I have bad credit?

Every loan application is very much dependent on personal circumstances. It is though, unfortunately, true that having bad credit may be a significant barrier to your chances of having a loan approved. 

There are some options for getting a small business loan with bad credit. A cash advance loan or a guarantor loan are just two options. I’d suggest speaking with your financial advisor to see which you are more likely to get.

Grants, on the other hand, are not subject to the same rules. They may be a more realistic option for you if your credit rating is working against you.

What can I use the funding for?

A loan or grant for your small business must be used for it’s intended purposes. You may want to invest in some advertising or secure premises, for example, and that would be fine as long as your grant or loan was given for that purpose.

If your home is your office, perhaps you need to do some modifications. If your photography business needs a home-studio, or your dog grooming service needs a garage or shed converted, these would be great reasons to look into funding. A business like a plumber or a decorator may need a new vehicle for the business, and funding these with a loan or grant may be a good option for you.

There are some grants, as well as tax incentives, that are specifically designed to help pay employees. It’s really worth doing your research here as there are many options if you dig deep!

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Do I even need funding?

Just because there are options for funding, it may not be necessary for your small business. If you are already employed and thinking of starting a business, why not try to see if it will work on the side as a side project?

Are small business loans hard to get? | The Small Business Question

One of my favourite entrepreneurs, Gary Vee, said: “7 until 2 in the morning is plenty of time to do damage”. When it comes to running a successful small business, he’s right. If you have the energy, and your family commitments allow, consider a “try-out” version of your business before you start. If you want to open a cupcake shop, make some batches and take them to work. Sell them for charity (or 50/50) and see if there’s much interest in your product. Pop a business card in with each pack and that’s an inexpensive way to start! 

This is clearly not going to be an option for all businesses, but if you can it’s a great way to test out your idea!

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