To grow your business you may need to inject cash into it – to purchase machinery, take on sales staff, buy larger amounts of stock, or start exporting.
Use our blog series to understand your funding options and the advantages and disadvantages of each method.
Part 2: Business Loans
Business loans are a traditional type of finance available to both start-ups and existing businesses seeking to scale up.
The loan amount needed, security available and business track record will influence the loan term, conditions, interest rate and fees.
Also whether it is provided by:
- High Street Banks and Building Societies
- Alternative Business Loan companies
- Individual Investors, or
- The Government (for start-ups)
For further information see https://www.money.co.uk/business-loans/6-easy-ways-to-get-finance-for-your-business.htm
Advantages of business loans:
- A cash lump sum
- Retain full business ownership
- Usual loan term of 15 years
- Sometimes initial 12-24 month capital repayment holiday
- A fixed rate gives the same monthly payment allowing budgeting
- A variable rate means monthly payments go up and down depending on Bank base rate
Disadvantages of business loans:
- Must pay interest
- Arrangement fee plus legal fees
- May require legal charge over property or personal guarantee
- May need to demonstrate can afford capital & interest repayments
- Can take a long time to get money
- May be early repayment penalty
- Damage credit history if not repaid
- Must comply with conditions, such as regular financial updates
- No assistance from investors such as introductions and experience
Each loan provider offers different minimum and maximum loan sizes, so options may be reduced for very large (over £250,000) or very small (under £5,000) amounts.
Only borrow what you need, to avoid repaying more than you have to. But ensure you borrow enough to achieve the expansion plans.
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Loan repayment terms can be short, such as 1 month (a bridging or payday loan) or longer, up to 15 years.
Review the amount you budget will be available for monthly repayments. The longer the loan, the lower the monthly payments but the more interest paid overall. To calculate monthly repayments see https://www.experian.co.uk/business-express/hub/business-tools/business-loan-calculator/.
The exception to this is bridging loans and business cash advances (payday loans), that charge higher fees and interest to offset the short-term nature of their product.
Request an initial interest-only payment period to assist cashflow if it is likely to take some months for additional income to flow into the business from the investment.
An unsecured business loan is borrowing which does not require security such as a legal charge over your home or business assets. The amount will be limited to around £25,000.
A secured business loan can be secured against different assets, depending on the value and purpose of the loan. Security may include a personal guarantee, security over the asset purchased or over other business assets. Secured loans allow businesses to borrow larger sums of money than unsecured loans.
A peer-to-peer business loan could be considered – the appropriate platform for your business legal structure will need to be used.
For further information see https://www.moneysupermarket.com/business-finance/peertopeerbusinessloans/ and https://www.gocompare.com/loans/business/.
If you can provide profitable Accounts for the last 3 years, 6 months good bank statements and 3 year projections showing affordability of loan repayments, low-risk traditional lenders are likely to offer you good loan terms.
If not, or if you and/or the business have an adverse credit history, alternative lenders with higher rates and fees may be more likely to assist. Some lenders will accept projections, most will require security.
Usually, the higher the risk a lender perceives you as, the greater the reward (interest & fees) they will need to consider lending to you.
Always shop around – lender appetites and attitudes to risk vary widely. For example, see https://www.knowyourmoney.co.uk/business-loans/ and https://entrepreneurhandbook.co.uk/business-loans/.
If you are a start-up, the government may provide an unsecured loan of up to £25,000 at a favourable interest rate, for up to 5 years, subject to satisfactory information – see https://www.gov.uk/apply-start-up-loan.
Banks and government agencies will require a detailed business plan that describes your objectives and how you plan to achieve them. It should include descriptions of:
- business products/services
- target customers, the market, and competition
- goals and strategies
- sales and marketing plans
- operational plans
- financial history, forecasts and assumptions
- skills and experience
- potential risks and mitigation plans
For a business plan template see https://www.startuploans.co.uk/business-plan-template/. For further information see https://www.gov.uk/write-business-plan.
Banks and government agencies are particularly judging their risk by assessing the team running the business, as well as the financial information and sector trends.
So if you have lots of experience but know you are weak in one area – say sales – consider strengthening your offering by appointing a well-connected, experienced sales person, subject to obtaining funding.
For further information see https://www.belbin.com/about/belbin-team-roles/.
Consult with professional advisers to find the right financing for your business’ needs and understand the tax and legal ramifications.
Find a legal adviser at https://www.gov.uk/find-a-legal-adviser.
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