Business Loans and Finance – the pros and the pitfalls

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Here we look at the advantages of taking a loan and what options are available to you, including potential issues that may be a barrier to raising a loan.

Before looking at your options for a loan, you should first consider the amount you need. What will be the costs of setting up the business, operating costs once you have launched, and what income you need to live on. What realistic target do you have in mind before you think you can comfortably cover costs? There are so many things to consider when you first set up a Company or business – many of these things will be only considered as you develop your business plan. So you need to grab a pen and paper and take a serious look at all the things you need and what the minimum financial outlay will be.

Once you are satisfied that all the start up and running costs have been established, and you feel you need a cash injection to realise your plan, you can then look at the options for taking out a loan. The following is a brief rundown of the most popular ways of getting a loan to start your business:

Personal Loans or credit card loans

Depending on the level of finance you need, a credit card loan either personal or specifically for you’re business can be a viable option to get you started. With what seems an endless number of loan Companies available to choose from in the UK today, you have the flexibility to shop around before finding the right loan for you.   Personal loans can be advantageous as you can expect a quicker response to see if your application is successful, and the funds are normally transferred to you’re bank account within three days, in most cases even quicker. However as you can expect, the interest rates are extremely high, in some cases bordering on extortionate, so unless you’re happy to pay a very large sum on top of your initial loan this would be for most start ups their last option. You could also incur additional charges to you’re initial payments if you are late with a payment.   Business loans can be more flexible and more forgiving than a personal loan, but again you can expect to be charged extra if you miss a payment. The loan Company would also require evidence of the viability of you’re business plan and will definitely conduct a thorough credit check.

Either way, if you feel that a loan will be the easiest way to get funding for your business, always seek professional advice and always read the small print carefully so you have a complete understanding of the terms you are bound by before you agree to a loan.

Bank Loans

A loan from a commercial bank is another option of debt financing, and like most loans this will normally be a loan that you will need to repay over a fixed amount of time with additional interest – although the interest rates are normally a little more forgiving than the average high street lender. Banks are however quite reluctant to lend for business reasons unless you have a clear and precise business plan, a robust resume including references, strong credit history and in most cases will require you to raise some of the collateral yourself. Be aware however, you will be expected in most cases to pay back the loan immediately, regardless of you’re circumstances.

Equity Capital

Many Companies have successfully established themselves through selling shares in their business to venture capitalists and similar private investors. Crowd funding is also an option, and they can easily be found on various funding websites, where you are invited to submit a dragon’s den style pitch and interested investors can offer you start up cash for a percentage of shares in you’re business.

It can sound like a good idea, especially as you would benefit from the business savvy experience of the investor. However some investors may want a considerable chunk of you’re business in return for their investment, and if they are not receiving the ROI they were expecting, they may decide to take full advantage of their position as shareholder and get a little more involved with the day to day running of you’re business than perhaps you would like!

There is also the fact that most venture capitalist prefer to invest in Companies after the first three years of initial launch, as a  working business model decreases their risk.

Remortgage

Years ago when the economy was booming, most people would only remortgage their home to buy a Car or go on holiday. Today raising capital for a business idea is the biggest reason why people are remortgaging their homes. There are a number of pros and con’s to this practice so before you go down this path you should consider the following:

There is an advantage to a remortgage – you’re interest will be relatively low. A lender will give you the options on the best buy rates when you borrow extra. These can be up to half what a high street lender would charge and a fraction of what credit card Companies normally permit. You can also mix and match you’re interest rates, for instance if you are currently on a fixed rate mortgage you can have the extra loan on a low – rate tracker agreement.

Repayments can be spread over a much longer period of time which would reduce you’re Monthly outgoings. The extra finance you take off a remortgage can be paid over ten years or even more, while a personal loan normally has to be paid within three to five years. Banks are also less stringent in their criteria of allowing a homeowner to remortgage, their terms normally include ‘for any legal purpose’ which of course includes financing a start up. As long as you can prove you’re current income would cover the repayments it is also unlikely you will need to submit a thorough business plan.

However if you are currently out of work, or are the sole breadwinner, the Banks will need a lot more convincing you can afford the repayments. The most successful applicants are normally currently employed and are setting up their business in their free time.

You will also need a lot of equity available in you’re property to release the money you need. A lender wont normally let you’re total borrowing exceed 80 percent of the value of you’re home, and you will have to pay an initial fee for the paperwork. You will also need to start paying the interest straight away, although you could look into mitigation by re-investing the money into a top paying savings account, you would need to fully understand this by talking to you’re financial adviser.

As with taking any type of loan against you’re house, you need to be aware that you could lose you’re property if you do not keep up you’re payments. For further reading visit www.businesslink.gov.uk

The alternative to the above options is to work hard , stay patient and keep you’re operating costs to the bare minimum, and start saving! That way when you’re ready to launch you owe nothing but you’re overheads, and in the last year alone, tens of thousands of businesses in the UK have launched with start up costs being as little as a couple of thousand – some businesses much less than this, so it CAN be done!