Borrowing from banks to fund your business

Last updated: 22 March 2017

A common way of funding a business is to borrow money from a bank.

Banks can offer:

  • loans
  • overdrafts
  • business credit cards
  • invoice finance (using unpaid invoices to raise cash)
  • asset finance (borrowing against something you own or plan to buy)

These types of borrowing are known as 'debt finance'.

Before they lend you any money, banks will expect your business to meet certain criteria.

Contact the bank

Before you apply to a bank for money, it's worth contacting them and explaining:

  • who you are
  • what you do
  • what you're looking for

This will help you work out if the bank is likely to lend your business money.

Even if one bank isn't willing to lend your business money, there might be another bank that is.

What banks look for

The main thing banks look for when lending money is whether your business is able to repay the money they lend.

All banks will have slightly different criteria they use to judge this. But there are common things you'll need to show them to prove you can repay the money.

If you have a business plan, you'll already have many of the things they'll want to see.

When making lending decisions, banks usually ask to see:

1. Your business accounts

The bank will want to see your business's historical performance for the previous 3 years (or for how long you've been trading if it's less than 3 years).

This will include your:

  • profit and loss accounts
  • balance sheet

They'll also want to see how you've planned your finances (financial projections) for the next 3 years, including your:

  • profit and loss accounts
  • balance sheet
  • cash flow statement

2. Security

'Security' is something you own (an asset) which you can offer the bank if you can't repay the money they've lent you.

This could be:

  • a cash deposit
  • property
  • vehicles
  • equipment
  • stock

This could also include money you're owed by other businesses you supply (debtors). For example if you're using your invoices to raise cash.

If you have a cash deposit to use as security, think about whether you actually need to borrow any money from a bank.

Enterprise Finance Guarantee scheme

Enterprise Finance Guarantee is a UK government scheme that helps businesses that don't have enough security, by guaranteeing bank loans.

The bank still decides whether to lend your business money but the government pays some of the cost back to the bank, if your business can't repay.

Businesses using this scheme pay a fee to the government, on top of the interest they pay for their loan.

You can find more information on the Enterprise Finance Guarantee scheme on the British Business Bank website.

3.Your market

This is information about the market or expected market for your products and services. This means the types of people who'll want to use or buy your idea or products.

A bank will expect to see details of:

  • how you think the market will grow
  • anything that could impact growth
  • any competitors you have

4. What you need money for

A bank will want to know what you're using the money for. This will affect whether they give you it or not.

For example, banks might be more willing to lend money for equipment than marketing.

Purchasing equipment involves less risk for banks, because it can be sold on again if your business can't repay.

If you're looking to buy assets, for example equipment or vehicles, there are also specialist lenders for this.

5. Your personal finances

A bank may also look at your personal finances. This will include:

  • your personal credit history
  • any assets you own, like a house

If you have a 'bad' personal credit history, a bank might consider whether your business could have similar problems.

A bank will normally only use your personal assets to secure a business loan if your business doesn't have something else it can use as security (like a cash deposit or property).

If you're a sole trader the bank will definitely take your personal finances into account.

Provisional loan limits

If your business has an account with the bank you're looking to borrow from, you might already have a 'provisional loan limit'.

A provisional loan limit is an amount of money your bank is willing to lend you, based on their existing knowledge of your business's finances.

This will normally be shown in your online banking account.

To apply for this amount you might still need to show your bank your business plan.