How to get a business loan for my retail store?

Finding the right type of business financing is a crucial question for small retailers that are just starting. If you get tied to a loan that doesn’t cover your start-up costs to open your retail store or entails monthly repayments that are out of your budgetary capabilities, you could cripple your business before it even starts. 

You should take the process of deciding what type of loan you need to fund your business very seriously. This is one of the most important business decisions a small retailer will make. You will need to have a good understanding of what types of loans are available to you to make sure you make the right decision. 

Types of business loans

In general, there are five types of small business loans that are suitable for start-up retail businesses. Let’s take a look at each one in detail.  

Secured business loans

The most common type of start-up business loan is a secured business loan. These are loans whereby a retailer will borrow money against their assets. If you don’t meet the loan repayments, then the lender can seize the assets as payment against the loan.

The assets you use as security for the loan can vary depending on the amount of money you wish to borrow and what you want to use the money for. 

A retailer will usually put up a variety of personal assets as security for a business loan. These assets are secured via a personal guarantee from the retailer with the lender. Secured loans are usually repaid over a long period and can allow a retailer to borrow larger sums. There is a risk, however, that assets such as the family home could be seized by the lender if you don’t meet the repayments. 

Unsecured business loans

An unsecured business is simply when a business owner borrows money without putting any assets up as security. Because there are no assets to back up the loan, unsecured loans are usually for smaller amounts over a shorter repayment period than secured loans. The exact amount you can borrow, how long you have to pay it off, and the interest rate applied will all depend on your credit history and the creditworthiness of the business.

Unsecured loans are great options for small retailers who have low start-up costs for their business and have a good credit standing.  

Peer-to-peer lending

Peer-to-peer (P2P) lending platforms are becoming more popular with start-up retailers. In this scenario, a retailer will be borrowing money from an individual, a group of individuals, or another business. These days, many business owners seek to use sites such as GoFundMe to source peer-to-peer loans. 

Sometimes, these loans may come with additional terms and conditions imposed by the lenders. Lenders may want to have a say in running the business, or they may wish to come in as shareholders. While these loans can be suitable for a small retail start-up with low operating costs, they may not be ideal for bigger enterprises. 

Government-backed start-up loans

New retailers in the UK can apply for a range of government-backed schemes that provide start-up business loans. These loans are part of the Start-Up Loans programme that was launched by the Department for Business, Innovation and Skills in 2012.

These loans range from £500 to £25,000 and charge a fixed interest rate of 6% per year. Usually, a retailer can arrange to repay the loan over between one to five years. There is no application fee and no fee to pay the loan off early. Your business must be based in the UK and must have been trading for less than 36 months.

Government-backed start-up loans can be ideal for business owners who don’t need a large sum to start-up their business and have already been trading for some time. If you are a completely new business and have higher start-up costs, then a government start-up loan will not be suitable. 

Personal loans

As the name suggests, this is not a business loan. However, some people do decide to take out a personal loan from a bank to fund a start-up business or create a retail store. This can be risky, since the loan will be under your own name, and you will be personally liable for the repayments. Failure to make the repayments could seriously damage your own credit history. While a personal loan may be suitable for a small retailer, they are not advised for larger entities.

There are a few critical questions that you need to consider when choosing the type of business loan you need for your new retail store:

1. How soon do you need the money?
2. Do you know your credit score? 
3. Do you know exactly why you need the loan?
4. How much can you afford to borrow?
5. When do you see yourself being able to pay the loan back?
6. Will repayments impact your ability to run your business?
7. Are you comfortable offering collateral to secure the loan?

Before you apply for a business loan, whether it is from a bank, a financial institution, or an individual, it is always prudent to find out if you are actually eligible. 

To be eligible to secure any kind of business financing in the UK, you will need to be at least 18 years of age. You must apply as the owner of the business. You will need to be a resident of the UK and your business will have to be fully based in the UK. 

Your personal financial situation and the finances of your business will need to be in good order. If you have a poor credit history, you may be deemed as a high risk, and it will be more difficult to convince a lender to let you borrow money. Lenders will run a variety of credit checks on you to make sure they know your credit history. 

Some lenders will refuse to let certain types of businesses borrow money. If your business is related to the arms trade, pornography, banking or money transfer services, property investment, chemical manufacturing, or gambling activities, you may not be eligible for a business loan. 

Importantly, retailers need to make sure that they are not acting as an agent for a third party. This is where another entity takes most of the revenue earned by sales. This can apply to any retail business that is acting as part of a franchise or has worked out a deal where a supplier receives a large sum of monthly profits.

Working out exactly how much you can afford to repay each month is fundamental to the process of getting a business loan. The size of your repayments is related to the time period allocated to your loan and the size of the loan itself. 

You will need to consider your projected monthly profits and subtract the repayment amounts from these to ascertain if you can afford a loan or not. The interest rate will need to be considered when arriving at this figure. If you do not have a fixed rate of interest, you should make your calculations based on the highest projected interest rate. 

Please make sure that you are completely realistic with your expected profits and the fluctuations of your interest rate. Don’t inflate your profits or base your calculations on a blue-sky interest rate amount. Be realistic and consider worst-case scenarios. Otherwise, you will either be refused the loan or have repayments that you cannot afford. 

Not making the repayments on time can incur penalty fees. Failure to make repayments at all can result in the seizure of assets, damage the credit rating of your business name and your own personal credit rating, and even lead to criminal proceedings. 

Most banks or financial institutions have online loan repayment calculators that can give you a good idea of what your repayment amounts will be. An accountant may also be able to provide you with advice on what your maximum repayment amount should be. 

Collateralising a business loan means that you will be applying for a secured loan and therefore must show that you have assets you can pledge to the lender. Your assets have to be of sufficient value for the lender to want to accept them as collateral. There is no use in trying to pass off a worthless asset as security. Your lender will want collateral that they can sell to help them recoup the loan if you cannot make your repayments. 

Collateral can be:

• Property, for example, the family home
• Vehicles
• The business’ premises
• The business’ inventory
• Other business assets, such as shop fittings
• A guarantee from another individual or business
• Stocks or shares 
• Items of significant value, such as artworks or jewellery
• Cash

A business loan is a big step, and you should take a considerable amount of care in choosing which institution you accept a loan from. Consider the following points when comparing small business lenders:

• The reputation of the institution
• The interest rates on offer 
• If they offer fixed or variable interest rates
• The length of the loan period
• Any extra fees – late fees, early repayment fees, application fees

There are several online tools that small business owners can use to compare financial institutions offering start-up business loans. An accountant or a specialised small business loan broker may also be able to advise you.

First, decide on the type of loan that would best suit your business and your personal circumstances. You may wish to get advice from an existing business owner, an accountant, or a professional business consultant.

Allocate a good deal of time to prepare your documents before applying for a business loan. Write up a detailed list of who owns the business and their personal details. For companies, shareholders and directors will need to be noted as well as relevant company documents such as the Companies House registration. 

You will need to prepare a business plan that includes a forecast of your projected cash flow per month and you will have to show all your business assets and liabilities. Your own personal bank statements may be required. If you are applying for a secured loan, make sure you have a thorough list of your collateral with up-to-date evaluations. 

Prepare an estimate of how much you want to borrow and how long you wish to make repayments for. Make sure your finances are all in order and properly accounted for. Have your figures done by or double-checked by an accountant to be sure they are right. 

Then, find the right lender for your needs. You will need to fill out an application form and may have to pay an application processing fee depending on the lender you choose. Be aware that you and your business will need to undergo credit checks. If your application is successful, you will then need to formally accept the loan. 

If you are considering applying for a small business loan, then talk to the team at Ankorstore. Our Ankorstart program is designed to provide new retailers with all the support and guidance they need to get their business up and running.