Do I need a business plan to apply for a loan?

Having a well-thought-out business plan will greatly improve your chances of being approved for a business loan. Most – but not all – lenders require a business plan when you apply for a loan.

Even if your lender doesn’t ask for a plan, it is a really good idea to have one. Your plan will help focus your mind on what you want to achieve, how you can achieve it, and how much you need to borrow to make it happen.

Check out our guide on How to Write a Business Plan. We've even got a business plan template you can download.

If you're just getting started, you can also find our full guide on How To Start Your Own Business, here.

What does a business plan include?

A business plan generally contains the following information:

• Executive summary

• Description of the business

• Market research and sales strategy

• Business structure and staffing

• Description of your operations

• Financial forecast

You might find it relatively easy to describe your business and structure. It is the financial forecast that’s going to take the most of your time.

It is worth spending time getting this right. These are the juicy financial insights that are going to convince them you’re a good candidate for a loan.

Don’t be tempted to exaggerate your figures though or you could find yourself in difficulties when it comes to repaying.

Download a business plan template

There’s no need to reinvent the wheel. Download our business plan template to help guide you through the business planning process.

We've kept the jargon to a minimum, and each section has an explanation and a set of example questions to help you tackle it.

Borrow what you need, not what you want

The next step is deciding how much to ask for. It can be tempting to ask for as much as you’re eligible to borrow.

But remember, you’ll need to pay it back!

So, work out an amount that is enough to meet your growth plans, but not so much that you’ll struggle to make repayments. Check out our article on how much it costs to start a business.

Our veteran business advisor Tony – who has supported loans of over £12m to 1,000 people – says:

 ‘Need is the operative word here. Not “nice to have”. Don’t go over the top and budget for a £500 office chair when a £50 one will do the job. Don’t buy a brand new £25,000 van if you can find a reliable secondhand one for £5,000.’

Prepare a cash flow forecast

Don’t forget that cash flow may vary from month-to-month. Invoices are usually paid in arrears, so you may have to meet upfront costs before you receive payment.

You’ll need to be sure that you’ll always have enough in the bank to meet your monthly loan repayments or you could face financial penalties from the lender.

Preparing a cash flow forecast will help you understand how money moves through your business and decide how much you can afford to repay each month.

Take a look at these articles for more information:

• Getting started with budgets, cash flow and pricing

• 12 steps to optimise your small business cash flow during Corona

Responsible lenders – ie the ones you want to deal with – will expect you to pass a credit check. This can feel punitive but it is to protect you. Nobody wants to offer a loan to someone who will end up in financial difficulties as a result.

There is no set credit ‘score’ that means you will or won’t be approved. But lenders will look for indications that you have successfully borrowed and repaid money in the past. They’ll check for defaults on past payments for loans, credit cards, store cards etc.

Knowing your credit history in advance means that you can avoid making an application that is destined to be rejected.

Take a look at our eligibility guide that answers the million dollar question: Am I Eligible for a Business Loan?

You could even go away and work on improving your score before applying. A poor credit history can be trumped by a new improved credit history. If you’ve had credit issues in the past but now got your finances in order, you could still be eligible. It is worth asking your chosen lender in advance.

Apps like Experian and Equifax will show you your credit score for free, but you may need to pay for a more detailed report. Other apps, like ClearScore or Credit Karma – will give you a basic report for free.

Once you know how much you want to borrow and have worked out how much you can afford to repay, it is time to research lenders.

There are lots of different business finance options out there, from high street banks to startup loan specialists, online banks and peer-to-peer funds.

All of them will have different:

• terms and conditions

• eligibility criteria

• interest charges

• repayment terms

Decide who you want to deal with, what benefits they offer you and your business, and shortlist lenders to explore further.

Think about things like:

• interest rate

• reputation as a lender

• availability of payment holidays

• any deposits or security required

Don’t forget that whenever you apply for a loan, a credit check is run. This can leave a footprint on your credit report. Too many credit checks can negatively impact your credit score. So choose your lender carefully and make sure you meet their eligibility criteria (see below).

How much does it cost to get a business loan?

Once you’ve shortlisted your lenders, you can work out how much your loan will cost you with each of them.

Many lenders will have a loan calculator on their website – we do – which shows you the monthly and overall cost of your loan.

You should be able to adjust your borrowing amount and loan duration to see:

• What you’ll pay each month

• How much interest you’ll pay overall

For example, a £5,000 loan over 24 months at 6% means you’ll repay £221.25 a month and £5,310 overall.

That means you’ll pay back £310 more than you borrowed. This is the overall cost of the loan. 

Am I eligible for a business loan?

If you want to check you are eligible before you apply, many lenders let you. You’ll often find their website will have an eligibility checker that can pre-qualify you to apply, without running a credit check. Read our guide to business loan eligibility to discover more.

If you suspect you might not be eligible, do some research. There are specialist lenders that will consider people with different challenges.

For example, people who have had poor credit in the past, people who are currently accessing benefits, and businesses without any prior trading history.

Take a look at Start Up Loans.

What paperwork do you need for a business loan?

Most businesses want a decision – and the money – as soon as possible. One way to avoid unnecessary delays is to have all of your paperwork in order before you apply.

You’ll need to have:

• Your latest accounts (if you’re already trading)

• Recent bank statements

• Relevant identification documentation

Your latest accounts

If you are already trading, have your latest accounts available. Read this article if you're not sure what accounting records to keep.

If you haven’t been trading long enough to have formal accounts yet, prepare your own records for the last three months. Include:

• How much income you’ve generated each month

• How much you’ve spent in order to do it

• Your monthly profit (income minus expenditure)

If you haven’t started trading at all, and are looking for a loan to start a business, you may need to apply through a specialist Start Up Loan provider. They won’t ask for accounts but will want to see realistic revenue projections – the profit you predict you’ll be able to make.

Bank statements

Lenders will want to see the last three months of business bank statements. You should also have your last three months of personal bank statements handy too, just in case.

Usually – unless you’re applying for a loan with your existing bank – you’ll need official statements that include your name and address.

If you bank online and don’t receive paper statements, you may have to request these, so do this in advance.

Identification documents

 Lenders have a legal duty to verify your identity, so they’ll need to see photo ID and prove your address.

Typical forms of ID include:

• your passport

• driving license photo card

• credit or debit card

• bank statements / utility bills

Check that your ID documents are all in-date, feature your legal name and your current address.

Other information

There may be other information required to assess your application. These will depend on the nature of your business. For example, if you are proposing to buy an existing business or franchise, you may need to submit additional information relating to that.

Speak to your lender in advance

Try to speak to your chosen lender in advance of starting your application, to make sure you understand what’s needed.

At Transmit Startups, we have a triage process where we help you get everything prepared in advance. Our helpful business adviser Dan – who talks to all applicants in advance of their application – says:

‘To avoid any delays, prepare your documents carefully. They are going to be used to approve a loan so they have to be ‘document standard’. That means photos need to be taken carefully, bank account details need to match. Most people have more than one account these days so check that twice.’

How do you complete a business loan application?

To apply for a loan, you’ll have to fill in an application form. This might be a paper form or online.

It will usually include questions on:

• Your personal information

• Your business information – purpose, structure, trading history, future plans

• How much you want to borrow

• What you’ll use the money for

• Your financial position and ability to make repayments

Talk to your lender, if invited to

You may be invited to talk through your loan application with the lender. This might bring you out in a cold sweat but, armed with your business plan and a sound understanding of your financial information, you’ll be fine.

How long does it take to get a decision on a business loan?

Once you’ve submitted your application, you’ll have to wait to hear the outcome. Bad news travels fast and a rejection can be very quick, especially if you fall foul of robot decision-making. Some banks will issue a fairly instantaneous ‘computer-says-no’ decision.

Other lenders use humans, not robots, to individually assess each application on its merits. This can mean it takes a little longer to get an answer. But you know your application has been reviewed and all angles considered. 

An approval may take anything from a day, to a week, to longer. To make sure you don’t waste time anxiously waiting by the phone, ask how long it will take when you apply.

What happens when a business loan is approved?

Hopefully, you’ll get the outcome you want, and your loan will be approved.

You’ll receive a notification from the lender and they’ll let you know when the money will be in your bank.

Accessing the loan is called ‘draw down’. This means you have received the loan and any interest will begin to accrue.

Unless you have agreed an immediate repayment holiday, you will need to start making monthly repayments straight away.

What happens when a business loan is declined?

If you aren’t approved for your business loan, it is a good idea to ask why.

There may be reasons that are specific to the lender you selected. In which case, you may be able to apply elsewhere straight away.

Alternatively, you may have been declined because of an issue with your business plan that you need to address. Although it is disappointing to be turned down, it may surface an issue that you can fix. Or it may mean you decide to review your business idea altogether.

Remember, business is all about the ability to bounce back from the unexpected. Getting rejected for a business loan might be the catalyst you need to improve your plan and move on to an even better idea.

Our Start Up Loan calculator can help you check how much you could be eligible for.