Can a New Business Get a Business Loan?
Yes, a new business can potentially obtain a business loan, but the younger the business, the more limited its borrowing options are likely to be.
Most mainstream SME lenders prefer businesses with an established trading history because this gives them evidence of actual turnover, cash flow and financial performance.
A start-up or recently established business doesn't have the same track record. As a result, lenders may place greater emphasis on the experience of the owners, current trading, available security, personal credit history and the purpose of the borrowing.
The important distinction is also between a genuine start-up that hasn't started trading and a relatively new company that is already generating meaningful revenue.
What counts as a new business?
There isn't a universal definition.
A business could be considered "new" if it:
hasn't started trading yet;
has been trading for only a few months;
has been trading for less than a year;
hasn't yet filed its first set of accounts; or
has recently incorporated after previously trading in another form.
These situations can present very different lending propositions.
A company that started three months ago and has no meaningful revenue is very different from a company that has traded for 18 months and is already generating £100,000 of monthly sales.
This is why lenders usually look beyond the incorporation date.
Why is it harder for a new business to borrow?
Business lending decisions rely heavily on evidence.
For an established company, a lender may be able to review:
several years of accounts;
historical turnover;
profitability;
recent bank transactions;
existing borrowing;
credit history; and
evidence of how the business has performed through different trading conditions.
Much of that information simply doesn't exist for a new business.
The lender is therefore being asked to make a decision based more heavily on what might happen in the future rather than what the company has already demonstrated.
That creates additional uncertainty.
Can a start-up get a business loan before it starts trading?
Potentially, but conventional SME business loans are generally more difficult to obtain before a business has started generating revenue.
There is no established cash flow from which to repay the loan.
A lender considering a genuine start-up may therefore place greater emphasis on:
the business plan;
financial forecasts;
experience of the founders;
personal financial position of the owners;
amount of capital the owners are investing;
available security; and
proposed use of the funds.
Specialist start-up finance may be more appropriate than conventional SME lending in these circumstances.
Can I get a business loan without filed accounts?
Potentially.
Not having filed accounts doesn't necessarily mean that a business isn't financially established enough to borrow.
A company can have been actively trading for a meaningful period before its first statutory accounts become available at Companies House.
Lenders may instead be able to assess information such as:
business bank statements;
open banking data;
management accounts;
VAT returns;
current turnover; and
credit information.
For lenders that place significant weight on current cash flow, recent banking information can provide a useful picture of how the company is actually trading.
Can I get a business loan after six months?
Some lenders will consider businesses with around six months of trading history.
At that stage, there may be enough banking information to establish the company's approximate revenue and cash-flow patterns.
However, lending options are likely to be more limited than for a business with several years of established trading.
A lender taking the additional risk of financing a younger company may also offer:
a smaller amount;
a shorter term;
a higher interest rate; or
more stringent guarantee or security requirements.
Different lenders have very different minimum trading criteria.
Can I get a business loan after 12 months?
Potentially, and the range of available lenders is likely to increase as the trading history becomes longer.
Twelve months provides a lender with a full year of actual trading data.
This can be particularly useful for businesses with seasonal revenue.
However, one year is still a relatively short period in credit terms.
A lender may therefore continue to place considerable weight on recent bank conduct, cash flow and the financial position of the directors or guarantors
.
What do lenders look for in a newer business?
Where there is limited historical information, current performance becomes particularly important.
A lender may look closely at:
Revenue
Is the company generating meaningful and consistent sales?
A business whose monthly revenue has developed from £20,000 to £30,000 to £40,000 may provide evidence that it is establishing itself.
Cash flow
Is the company generating enough cash to meet its existing obligations and the proposed new repayment?
Revenue alone isn't sufficient if the business is continually running out of cash.
Bank conduct
Repeated returned payments, an exhausted overdraft or rapidly deteriorating balances can make lending to a young business particularly difficult.
Conversely, consistent revenue and satisfactory liquidity can provide useful evidence of financial stability.
Existing borrowing
A relatively new company that has already accumulated several loans can be a concern.
The lender may question whether borrowing is supporting productive growth or being used to cover continuing cash shortfalls.
Management experience
An experienced management team can provide additional comfort.
A director who has spent 20 years successfully operating businesses in the same industry presents a different proposition from someone entering the sector for the first time.
Does being profitable help?
Yes, although profitability isn't the only consideration.
A new company may initially report losses because of start-up costs and investment.
A lender may therefore want to understand whether those losses are temporary and whether the underlying business is moving towards sustainable profitability.
Cash flow can sometimes be more immediately important.
A company can show an accounting profit but still struggle to meet its obligations if customers take a long time to pay or large amounts of cash are tied up in stock.
Can strong turnover overcome a short trading history?
It can help considerably, but it doesn't necessarily overcome a lender's minimum eligibility criteria.
Suppose a business has traded for 12 months and is already generating £150,000 of monthly revenue.
That clearly provides more lending evidence than a 12-month-old company generating £10,000 per month.
However, if a particular lender requires a minimum of two years' trading, strong turnover may not change that policy.
This is why identifying lenders whose criteria fit the business can be as important as the underlying financial strength of the application.
Can a new business get an unsecured loan?
Potentially, although unsecured lending can be more difficult for younger companies.
Without asset security, the lender is primarily relying on the business's ability to generate enough cash to repay the loan.
A limited trading history provides less evidence that the company can consistently do that.
Lenders willing to provide unsecured finance to younger businesses may therefore place greater emphasis on:
recent revenue;
bank conduct;
personal guarantees;
director credit history; and
management experience.
Can a new business get a secured loan?
Potentially.
Providing suitable security can strengthen an application because it gives the lender an additional source of repayment if the business fails.
However, security doesn't automatically make an unaffordable loan affordable.
A lender will still normally want a credible explanation of how the company intends to service the repayments.
Where the business hasn't yet established sufficient cash flow, specialist start-up or asset-backed funding may be more appropriate.
What if I've previously run the same business as a sole trader?
Tell the lender.
A newly incorporated company doesn't always mean a genuinely new business.
For example, someone might operate successfully as a sole trader for ten years and then transfer the business into a limited company.
Although the company itself is new, there may be substantial evidence of previous trading.
A lender may potentially consider:
historical accounts;
previous bank statements;
continuity of customers;
continuity of management;
nature of the business; and
performance since incorporation.
Different lenders will have different approaches, but the previous trading history is relevant information.
How much can a new business borrow?
There is no universal formula.
For an established business, turnover-based rules of thumb can provide a useful starting point for estimating borrowing capacity.
For a newer business, lenders may be more conservative because there is less evidence that current revenue will be maintained.
The amount available will therefore depend on factors including:
trading history + turnover + cash flow + existing debt + credit history + management experience + security.
The proposed loan repayments must also be realistic relative to the company's available cash.
How can I improve my chances of getting a business loan?
If your business is relatively young, concentrate on demonstrating what you can evidence.
Provide clear information about:
Current trading. Show what the business is actually generating rather than relying solely on forecasts.
Purpose of borrowing. Explain exactly what the money will fund.
Affordability. Demonstrate how the company can support the proposed repayments.
Management experience. Highlight relevant experience behind the business.
Existing debt. Be transparent about other finance commitments.
Any unusual issues. Explain adverse credit, returned payments or unusual transactions rather than leaving the lender to make assumptions.
And don't simply apply to numerous lenders in the hope that one says yes. Different lenders target different stages of a company's development.
Does Adelpha Capital lend to start-ups?
Adelpha Capital focuses on established UK SMEs rather than start-ups.
Our business lending products require a trading history of at least 6 months because our underwriting considers actual financial performance, including turnover, cash flow, recent bank conduct and existing financial commitments.
A business that is too young for Adelpha today may therefore become eligible once it has established a longer trading record.
If you're unsure whether your business meets our current eligibility requirements, you can contact the Adelpha Capital team before making an application.