Spending money to make money: when and how to apply for a small business loan

Image of a lady approving a business loan.

It’s cliched but true. You’ve got to spend money to make money. Many small businesses benefit from extra funds to start - or scale - their business. And a small business loan is one way to raise working capital

Whether you’re an early-stage business looking to cover start-up costs - or an established business going for growth - here are four reasons you might need a small business loan. Plus five ways to maximise your chances of a successful small business loan application.

5 reasons you might need a small business loan 

Business start-up costs

Soon-to-be business founder, we salute you! You’re making the leap and starting a business. It’s the beginning of a grand adventure. Whilst some businesses need very little upfront investment, others require a cash injection to get off the ground. Typical small business startup costs include:

  • Insurance and legal costs - such as public and employers’ liability insurance, and business registration fees 
  • Premises - if you need premises, remember to factor in the rent or commercial mortgage payments, plus business rates (tax), and utility bills
  • Transport - from delivery vans to fast food trucks, include the cost of buying or leasing the vehicle, tax, insurance and petrol 
  • Marketing - you’ll need to promote your business to get business, so budget for appropriate activities like a website, events, advertising, leaflets etc 
  • Equipment and tools - include the cost of kit you’ll need to run your business - anything from wood chippers to hair clippers, and lawnmowers to laptops 
  • Employees - staff costs will include their wages, NI and pension contributions - don’t forget to factor in extra for sick pay, holidays and family leave
  • Professional services - these might include accounting, marketing, IT, legal compliance…
  • Stock - see below

Because traditional lenders are often risk-averse, startup businesses aren’t always successful when applying for finance. Help is at hand through the government-backed Start Up Loan scheme, which is specifically designed for new businesses to borrow between £500 and £25,000. 


If you have a shop or e-commerce business, this usually means you need to invest in products, before selling them to customers at a profit. You’ll have to carry a good range of stock to make your business an attractive destination for shoppers. And you may need to refresh your stock regularly, especially fresh or seasonal products. 

The problem is, you’ll not get that money back straight away. And, depending on what you sell, sales may be affected by seasonal trends. A small business loan can help you stock your shop, delight your customers and even out your finances across the year. 

Cash flow

Cash flow (or lack of it) is one reason that causes businesses to go bust - especially within the first 12 months, when you may have had a lot of upfront costs but not seen return on that investment yet. 

You’ll need enough money each month to cover a range of essential costs - such as rent, wages, utility bills and so on. You may also need to invest in stock or raw materials. Plus you should also be setting aside money for the taxman too. 

To help you plan your cash flow, think about the following questions: 

  • Do your sales generate sufficient money to buy the stock for next month? 
  • Do your customers pay on time? 
  • Do you have a small number of big customers? What happens if one of them doesn’t pay? 
  • Can you pay your employees on time every week / month? (This is important!) 
  • Is there sufficient money in the bank to pay the tax bill / VAT bill when that is due? 

If your cash flow is looking shaky, you might find yourself in the frustrating position of having customers but not being able to deliver your services - for example, a carpenter may have customers waiting for furniture but not have the cash available to buy wood.

Taking out a small business loan can ensure you have enough ready money to keep your business running smoothly and working towards profit and positive cash flow.

Business growth

A wonderful reason to take out a loan is business growth. If you’re in this position, congratulations on getting this far. Now’s the time to scale your business and unlock the next level of success.

Business growth can introduce a range of additional costs - like more staff, extra equipment, bigger premises and higher overheads. It could also require upfront investment such as acquiring another business or investing in new products. 

It’s very important to fund growth responsibly so that it doesn’t damage your existing operations. You’ll still need to keep your cash flow buoyant and serve your existing customers. If you don’t have sufficient cash in the business to fund expansion, a bank loan can help you seize those growth opportunities when you see them - without risking the business you’ve already built.

Five ways to boost your chance of getting a small business loan 

Goldilocks your application 

Applying for a business loan is a balancing act. If you overreach and apply for too much, you may risk being unsuccessful with your application. Or worse, you may be successful but then struggle to repay the loan. 

But, if you ask for too little, you might find you are underfunded. This can be dangerous as you might not be able to execute your plans effectively. Think like Goldilocks. Don’t ask for too much, don’t ask for too little - do your sums and go down the middle.

Apply in advance

It is much better to identify the need for finance in advance of any financial issues. If you are already struggling as a business, it is much more difficult to raise finance or investment. 

A lender is more likely to look favourably on a request that’s based upon a strong business plan with an achievable financial forecast, than an application to bail out a business that’s under financial stress.

Be specific 

Be specific about what you need the finance for and demonstrate the positive impact that it will have on your business finances. For example, if you want the money for marketing, show how the additional finance will help increase sales. Or if it’s for additional staff, show how they’ll improve performance and productivity. 

Writing a complete business plan and financial forecasts is the best bet for brand new businesses - as is applying through the government-backed Start Up Loan scheme

Provide evidence

Provide evidence to show you’ve fully considered your request. If you want to engage a supplier to do some work for you, get a quote. 

Or,  if you are looking to buy a piece of equipment, get a link to the specific product and include that in your supporting documentation. This helps the finance provider know you’ve based your application on realistic costs. 

Check your credit profile 

Before applying for a small business loan, check your credit score. You can see your business credit score on sites like CreditSafe or Experian. If you’re a sole trader, your personal financial status may be looked at too. Use a  service like ClearScore to get access to your personal credit profile and start building it up. 

Borrowing or raising money to fund your business can keep your cash flow buoyant during challenging early stages. It also unlocks opportunities for growth. So never think of debt finance as a dirty word - it is a legitimate business strategy. 

Whichever sources of small business funding you choose to pursue, make sure you borrow responsibly and never overstretch yourself.

And remember, if you are struggling with debt, you can contact National Debt Line or Step Change for advice and support. If you need further assistance with your finances and accounting, get in touch with the experts at Crunch. We're always looking for ways to support business owners, from sharing debt-funding options guide for SMEs, to helping you to make sense of corporation tax with our handy calculators.

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Richard Myers
Commercial Director
Updated on
April 3, 2023

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