In our recent article on debunking business loan myths, we discussed the question of new businesses. Lots of people are under the impression that, as a new business, it's not possible – or at least very difficult - to get a business loan. While it's true that without a financial track record it can be harder to secure borrowings, it doesn't mean you don't qualify for business loans, it just means that there may be different criteria that you need to meet, or you may need to search for the right lender. 

Why is it harder for new businesses to get a business loan? 

New businesses often find it harder to secure a business loan for a number of reasons, all of which make them seem high risk in the eyes of many lenders. For example: 

A limited financial history 

Lenders typically rely on a business's past financial performance to assess the risk of lending, and as new businesses don't have an established history it makes it harder to predict their ability to repay the loan. Similarly, they most likely have an unproven business model, especially if the business owner is a first-time entrepreneur. Therefore, there's no real proof that the business model will be sustainable or profitable, making it hard for lenders to predict the company’s success. 

A risk of business failure 

There are lots of stats flying around, but Investopedia estimates that around 45% of new businesses fail within the first five years, making them an inherently riskier proposition for lenders. That failure can result from lots of things - it doesn't mean the idea was no good. For example, one of the challenges is a lack of funding, or a lack of cash flow availability in the early stages of business growth, which creates something of a chicken and egg situation when it comes to loans. 

A lack of collateral 

Lots of lenders require collateral to secure a loan, such as equipment, but many new businesses don't have enough assets to support the borrowing, which increases their risk profile. That said, some lenders, like Rivers, will accept personal guarantees from the business owner or, where appropriate, from a guarantor. 

The credit of the business owner 

For any business loan the personal credit history of the business owner is part of the picture, but where there's no financial history for the business itself, that background becomes even more important. A poor personal credit score can make it harder to secure a loan as raises questions about the value of their personal guarantee. 

Cash flow and profitability concerns 

New businesses might not generate significant (or any) profit in their early days, which raises concerns about their ability to repay business loans. Lenders want to see solid financials, including steady revenue streams and profitability, but a short operating history makes that hard to show. That's why a lot of lenders ask for two to three years of financial data. 

The lender's appetite for risk 

Banks and traditional lenders tend to be conservative when it comes to lending to new businesses, especially if they are unfamiliar with the industry. Typically, they prefer to lend to established companies with a track record of success, and this is where the non-bank sector has stepped in to fill the gap, often having a greater understanding of entrepreneurial mentality and a different approach to risk management. 

Economic or industry factors 

In uncertain economic climates, lenders become even more risk-averse and may tighten their lending criteria, making it harder for new businesses to qualify for loans. In addition, the wider environment makes certain industries 'tricky' in the eyes of lenders. For example, hospitality has become very difficult to find funding for in the wake of the Covid pandemic. That said, there are specialist non-bank lenders out there for specific sectors, while a lender like Rivers is non-sector specific and will consider any industry, which is quite unusual. 

Which business loans are available for start-ups?  

All of that makes a lot of sense, but the problem is that it doesn't really take into account the practicalities of operating a new business. It would often be very helpful to have cash flow loans early on so that you could grow faster and not compromise on decision making. Then again, you could make the argument that a few early challenges will stress test your business model and prove its value. 

All of that said, there are options available when it comes to loans for new businesses. For example, there are government start-up loans available with a fixed interest rate of 6%, where you can borrow between £500 and £25,000, and you must repay it within five years.  

Many of the high-street banks also offer start-up loans and depending on how much money you require there are other options such as grants, credit cards, your business account overdraft, and equity finance through schemes such as the Enterprise Investment Scheme (‘EIS’) and the Seed Enterprise Investment Scheme (‘SEIS’).  

The best new business loans  

At Rivers, we are unusual in our sector because businesses are eligible to apply for a loan from us, as long as they have been trading for three months or more. Where most lenders ask for a minimum of 12 months trading accounts, by understanding the full story and working with the business owner, as long as a company meets our minimum criteria, we are always willing to see where we can help businesses to thrive by providing the right funding solution.  

One of the ways in which we are able to do that is by being more agile than a traditional bank. For example, whereas a bank can only give a binary yes or no answer to your application, our Business Finance Specialists are able to make an offer if the amount or term isn't workable right now. 

If you would like to find out if a Rivers business loan is right for you, try our UK business loan calculator on our homepage to see what repayments may look like, and check your eligibility by answering a few short questions.