Many small businesses need capital or small business finance to help them develop, and there have never been more funding options available, from traditional bank loans to leasing deals and even grants. But the type and terms of the funding could have a critical effect on your business’s long-term future, so it’s important to choose wisely. Some of the options available are listed below.
If a company has lots of expenses to pay or needs money to see it through a rough patch then a short-term loan, usually lasting up to three years, could help ease its cash flow worries. The attraction is you will usually pay less in interest than if you spread your repayments over a longer period, but your monthly payments will obviously be much higher.
If you need the money to buy equipment for your business then you could also look into leasing. Many companies will arrange financing for small firms to encourage them to buy their goods and there are good deals on offer. In the last couple of years, the drop in business loan applications was partly attributed by the British Bankers Association to more small businesses agreeing alternative funding, implying that many firms have found other finance facilities to be cheaper and easier to obtain than bank loans.
Medium to long-term Funding
Longer-duration lending agreements, usually five years or more, suit companies that need to repay the money slower, because the monthly repayments won’t take such a bite out of their working capital. That can be good news for companies that know it will take them longer to get off the ground, or expect to see slower returns on their investment, such as setting up a new office.
How much a firm will repay will depend on the loan’s interest rate, which can either be fixed for the duration of the finance, or could vary, meaning the amount you owe could change according to the economic conditions.
These loans only tend to be offered by the high street banks, which are still rather reluctant to lend to small businesses and they would expect you to provide a detailed business plan and cash flow forecasts to back up your loan request.
The other big factor in how much interest a company pays, apart from the length of the term, is whether it opts for a secured finance facility. A secured, or asset-backed agreement is one where the borrower has pledged ‘security’, such as its vehicles, equipment or even office, which can be taken by the lender to pay off the outstanding amount.
Some small or start-up companies might not possess any assets that could be used as security, in which case its owners or directors might be asked to use their own properties to secure funding for their business.
Many new businesses won’t be able to provide several years of accounts, which may prevent them from getting a bank loan but, don’t worry, there are other options available to you.
Alternative sources of funding
Several new options have emerged as a result of banks’ reluctance to lend to small businesses since the global financial crash of 2008. The government stepped in to in theory help the riskiest prospects: new businesses. It’s Start-Up Loan Scheme provides no-fee, unsecured personal loans of £500 to £25,000 for up to five years. It claims to offer successful applicants free mentoring advice and exclusive business offers to help get their businesses on their feet. However, it has been reported that these facilities have proved very tricky to get accepted for, in the same way, Grants can be too. Some also say that it can take up to 2 months to get a simple yes or no so you’ll just need to be patient.
To get a start-up loan you need to pass a credit check, show your business is viable through a business plan and cash flow forecast, as well as provide a “personal survival budget” which explains what personal income you have to survive (and to repay the loan).