When running a business, it’s essential to have enough cash for working capital, such as for paying suppliers, employees, or tax, and for investment in capital items and growing the business. There are many ways that a business owner can borrow money.
Bank business loans
This is often the first option that you may think of, and it is still a very popular one. However although all the banks say that they are open for business, some doors may be more ajar than others. Many will ask for a business plan, and for small to medium-sized business owners much of the decision may still depend on the director’s personal credit profile.
- Check the likelihood of getting a loan in advance with your bank manager, to prevent you creating too many credit checks on your credit record
- Create a robust business plan, to demonstrate that you can repay the loan and also to determine how much you need.
- Calculate the full cost of the loan. You need to understand not just the interest rate but other things such as early repayment penalties, whether the interest fixed or variable, or if there an arrangement fee
- Go to a few banks for comparison. If you have a good credit profile you may be able to get them to compete for your business
- If you have to give security, such as a personal guarantee, ensure that you understand what it means
Enterprise Finance Guarantee (EFG) Loan
If you don’t have suitable security for a bank loan this is a government backed scheme that may enable you to gain finance. The process for the loan is the same as a normal bank loan so the tips are the same.
Your bank may not mention the scheme to you, as they may not like the additional paperwork, but do ask about the scheme as it is fantastic if your business is eligible.
Friends and family
Many businesses start off with funding and support from friends/family. This often can be quickly agreed and may be pretty attractive rate wise. However, do think carefully before agreeing to borrowing money from friends/family, as all too often these situations can go sour.
- Make a simple agreement as to the terms of the loan, loan period, interest rate, loan repayments, etc.
- What happens if your business fails? Will you personally repay the money?
- Keep them up to date with what is happening in the business, both the good and the bad
Borrowing against trade debtors can be arranged fairly quickly, and some providers are making the process increasingly simple. More and more sectors are being opened up to this business.
- Check how long you are signing up for the agreement, some providers offer one month renewable contracts
- Understand the full cost
- Check how much you can borrow. You will not be able to borrow 100% of your debtor list, so you need to understand what is available
- Compare providers
These are a flexible and fairly easy way to fund your business shortfalls. However, if used long term they can become expensive. Your bank will often offer an overdraft as a percentage of your turnover, perhaps 10-15%. However, if your turnover falls you may find that your bank will want to reduce your overdrafts. Overdrafts can be withdrawn so make sure you understand the terms of your overdraft.
- If using an overdraft for the long time, compare it to other lending methods, which may be cheaper, such as transferring your overdraft into a loan
- Try to stay within your overdraft, as charges for exceeding it are often excessive
- Have a back-up plan, in case your bank decides to withdraw your overdraft
Many businesses may be funded by a mixture of the above. As a business evolves it is important to review its borrowing options regularly, as some options may become more attractive as a business matures.
Recommended Next Read
Cash flow statement: How to use this financial statement
Guide to alternative funding
Discover 10 sources of funding for your business and how to apply in our essential guide for startups and small businesses.