Are you looking for new ways to finance your established business, or perhaps you’re just on the point of launching a new business and you need to secure funding to get you started?
Whatever stage your business is at, there are plenty of places to turn for financial assistance but there are just as many factors to consider when deciding which option to take.
If you’re in the process of starting a new business, or your business has been in existence for less than 24 months, it may be possible to obtain a government backed start-up loan. Other stipulations for eligibility include:
- You must live in the UK.
- You are at least 18 years old.
Government backed start-up loans charge a fixed interest rate of 6% per year, and the loan can be repaid over 1 to 5 years, with no fee for early repayment. There’s no application fee either.
These personal loans are unsecured, up to £25,000, and must be used for business purposes only.
To find out more, visit https://www.gov.uk/apply-start-up-loan
The Gov.uk website also carries a list of companies and organisations that may offer funding in the form of loans or grants, plus business advice and support, to businesses at all stages in their development.
To find out more, visit https://www.gov.uk/business-finance-support
The major banks all offer medium to long-term business loans, to businesses at all stages, from start-ups to companies wishing to expand.
Any bank will base their decisions on whether they grant you a loan on,
- your business plan, projections and business figures
- your credit history
- whether they feel you will be able to pay back the loan, especially if your business is not successful
A bank loan will be secured against your assets, so for instance, your home or business premises.
You can generally borrow money up to £125,000, depending on the assets the loan is secured on.
For a business whose income is changeable, a bank overdraft could be the way to go.
It provides a readily available and quick cashflow service that you can use during periods when income is lower than s comfortable or required. When your income picks up again, you can repay the bank overdraft amount.
You will be charged interest on any overdrawn balance and the bank is within their rights to demand the outstanding overdraft amount be repaid immediately if they feel that the service is being misused. Alternatively, they may suggest that the overdraft is converted into a bank loan.
Business cash advance
This is a relatively new service in the UK but can provide a short-term finance solution.
You receive a cash advance (between £10,000 and £100,000) from a broker. This amount is paid back as your customers pay you for your goods or services via card payments.
The percentage that you pay per transaction is generally around 20% of the value of that transaction.
You will be required, however, to use a Process Data Quickly (PDQ) terminal for card payments, have a minimum of 1 year’s trading statements for your PDQ, and an average minimum monthly customer spend by card payment of £3,500.
Business cash advances are often used by hotels, health and beauty businesses and high street stores.
With asset-based loans, such as leasing and hire purchase, you borrow money against an existing asset, such as property, business premises, or business equipment. If you fail to keep up your payments, the asset is re-possessed.
Whether you use leasing or hire purchase, the benefit of asset finance is that you don’t have to pay for a new item all in one go. You can space out the payment on a monthly basis.
However, you should check the guidelines on ownership with whichever form of asset finance you choose.
If you can get a business angel on board (a sole investor, network of investors, or syndicate who provide funding in exchange for shares in your company), then you may find that their involvement not only brings financial benefits but a whole host of valuable advice and support too.
You will be required, however, to provide a realistic business plan with growth projections, have the correct business figures to hand, and be willing to provide shares in your business.
Crowdfunding is a way to raise money through a business sponsorship page.
Investors tend to provide small amounts of money each, joining together with other investors to raise money with a particular goal in mind, such as getting a project or invention off the ground.
Investors are generally private individuals so the amount of money you may raise in this way may not be very large. However, it can be a great way to judge the popularity of a product or idea, and of course an excellent way to raise awareness of your business too.
A micro loan will only provide a ‘micro’ amount. This is a small loan ranging from £5,000 to £25,000, repayable over one to five years.
If you really only need a small amount of money and you want an arrangement that is individual to your situation, this may be the way to go.
However, the interest rate for micro loans can be higher than other types of financing and always worth checking before entering into a loan agreement.
Many community development finance initiatives (CDFIs) are currently operational in the UK. Set up to assist individuals and businesses who would generally be turned down for financing by banks and lending companies, CDFIs can provide bridging loans and other finance arrangements.
To be eligible, you will generally have to be a micro-business (sole trader or no more than two employees), social enterprise, or operate in a disadvantaged area of the UK.
If the idea of approaching a bank or other lender is too daunting and you want to save on interest payments (although this is not always the case), then borrowing money from a family member may be an option.
You already know each other so there is a level of established trust. If they do request interest on their loan to you, then it may be at a lower rate than with a bank or other lending institution.
The downside to this kind of arrangement is any upset or damage that may be caused to your relationship, should the agreement fall apart.
Other things to consider
Whatever option you decide on, there are a number of questions you should ask yourself before approaching anyone for business funding:
- How much money do you need? Not how much money would you like.
- Do you need the money, or could you cut down on costs?
- Do you have savings or investments that you could use?
- Do you have a business plan in place, with projections and business figures?
- Have you researched the viability of your business, or the reason you are borrowing the money? Will potential funders see it (and you) as a good investment?
- What exactly will you use the money for?
- When do you need to receive this money by?
- How soon could you pay it back?
- How will you pay it back? Should your business fail to bring in income immediately, how will you make your loan repayments?
- Will this be short term funding or long term?
- How healthy is your credit history? Can you provide an explanation for any unfavourable credit history?How legal advice can help
Deciding where to turn for a way to finance your business can be a complicated process. Knowing which form of finance would suit your business best requires an in-depth knowledge of business practices and a realistic view of your business’ future.
Specialist legal advice can guide you through all of these decisions, weighing up the pros and cons of each option considered to find the form of business finance that will suit you and your business best.