Small Business Loans

Introduction - most small businesses will still require start-up capital in the form of a small business loan (despite the fact that the majority of individuals also use their own personal funds).  A small business start up loan will help to pay for premises, salaries, marketing, computers, stationery and stock.  In this difficult economic climate, securing a small business loan is becoming increasingly difficult for entrepreneurs.   This article explores the issues surrounding small business loans for both start-up limited companies as well as debt consolidation and refinancing for established businesses.

What is a Business Loan? - commercial businessloans are designed to support the start-up firms and all are subject to the credit status of the business and its owner. They usually have pre-agreed length of time, fixed or variable interest rates as well as potential exit and early repayment penalty clauses. Some providers will also charge an arrangement fee.  For larger loans that involve investment in plant and machinery, a term loan is used to finance capital investments that are expected to be recouped over the long term period. The main types of business loan are as follows:-

• Secured Loans - a secured loan is usually secured over an asset of a company such as buildings or land. Providers of capital who of secured loans want to ensure their order of repayment is high. Banks like taking property as a form of security because they are stable in value and their physical nature.  Banks would normally use a loan to value ratio of between 70% and 80%.

• Unsecured Loans - the interest rate of an unsecured loan depends largely upon the individual's credit score rating. An impaired credit history (linked to unpaid bills, county court judgements, and all other socio-economic data), may dictate and individuals ability to achieve a cheaper unsecured loan.  Unsecured loans have similar characteristics; Firstly, they are typically short-term and are expected to be repaid within a few years. Secondly, they are charged on a monthly basis which means that the borrower can budget for sensible repayments. Thirdly, there's no need to put up any security for the loan i.e. it is unsecured.

How Much Money Is Required? - the first step is to decide how much money you really need.  To decide this it is important to budget for all start-up or one-off costs which are fixed, and then budget for all the ongoing variable expenses which will impact future cash flow. There are many online loan calculators to help you work out the overall costs. When justifying amount of money required to a lender, they will ask for comprehensive vaccinated as regarding your ability to service the debt.  The small business loan needs to be large enough to sustain you through the first period where sales revenue is small and customer loyalty, trust and reputation has not yet been established. When calculating the size of the loan required, it is sensible to employ the small business services of a qualified accountant to help construct a cash flow forecast to understand the impact of loan repayments on the business, as well as the number of sales required is to break even each month.

  Debt versus Equity - an important issue is to decide how much personal risk and control of the business you are willing to sacrifice in exchange for either a business loan from a bank or alternatively selling an equity stake in the company to a venture capitalist or business partner. Banks will insist upon some form of security for larger amounts which may be underwritten by a personal guarantee.  Any property given as security (which may include your residential home), may be repossessed if you do not keep up repayments on your mortgage or other debts secured on it.  Likewise, venture capitalists will want a large proportion of the shares available in exchange for business advice and financial assistance.  The downside of having a larger number of shareholders is that, the greater the number of shares is exchanged for Finance, the more say those shareholders will have in the control and running of the business.  Shareholders have rights to call an extraordinary general meeting to put forward a vote to remove the company director, if they feel that director is not acting in their best interests.  The basic question boils down to; how much can you grow the business with additional equity or debt?.  Can you grow your individual share by a greater proportion, without relying on debt or sacrificing equity.

Where to Obtain a Small Business Loan? - the credit crunch has made it more difficult to shop around and compare business loan from lenders. This is particularly true for business owners seeking bad credit small business loans.  This is because the number of loans on the market and stricter lending criteria is forcing more and more small businesses to opt for a loan from their own branch.  In addition, an increasing number of women seeking small business loans, who return to work following raising a family, will not have the same credit history report to assist in the credit application process.  With this in mind, the main sources of obtaining a business loan are as follows:-

• Independent Financial Advisers - The first step should always be to seek independent financial advice from a qualified IFA. The contact details of local IFA can be found at unbiased.co.uk.  An IFA will have access to the 'whole of market' loan rates from all market sources, and will be able to explain the pros and cons of obtaining business debt, as well as provide an unbiased opinion on your personal business situation.   An independent financial adviser or IFA is any professional person that has been approved to recommend financial products to individuals and businesses.  It is a highly regulated position of trust and individuals concerned must pass relevant exams to revise all specialist subject matters.   There are three main types of advisers.  The first is a tied adviser in which the IFA can only recommend a limited range of products from the organisation they represent.  Secondly, there multi-tied advisers, providing a wide range of products from a range of providers. Lastly there are independent financial advisers whose role it is to remain completely unbiased and offer a complete an expert view of the market.  The face-to-face meeting with clients' involves a detailed fact-finding survey of the clients needs and requirements, in order to sensibly recommend an appropriate solution.

• Retail Banks - nine out of ten small business firms use their local bank to obtain a business loan. Banks are looking for the security of a company asset, so they have relative certainty that they will receive their money back at the end of the period. Banks will charge interest rate that reflects the conditions of the current market and also the level of risk attached to the proposal. Banks also look at the range of factors related to the borrower themselves, when evaluating loan requests. These include the character of individual (in terms of their credit history report and whether or not they have a history with the bank itself). Banks also look at the capacity in other words the borrower's ability to repay a loan based on the business plan. They also look of the collateral of a borrower to see if the asset proposed is worth in excess of the loan. Banks also look at the capital to see whether or not the assets exceed the debts.

• Commercial Finance Brokers - a regulated and specialist commercial broker may be a good option if you require access to commercial property mortgage type products. This will provide a custom and face-to-face solution to assist you in financing of existing commercial debt or obtaining that first start-up business loan.

• Online Financial Comparison Portals - by harnessing the power of the Internet, it is possible to compare and apply for an online small business loan in minutes. Websites such as moneysupermarket.com and uswitch.com provide anyone with Internet access the ability to view the latest lender interest rates, assess the individual features of products, view the total cost of the potential loan and even complete an application form online.

• Small Funds Loan Guarantee Scheme - government small business loans can be provided via the small fund loan guarantee scheme (SFLG).  This has been set up by the Department for Business, Enterprise and Regulatory Reform (BERR) and the participating lenders.  It is operated by specialist banks and other institutions and provides finance for small businesses that have failed to secure a loan from high street banks. (SFLG) helps to overcome this by providing lenders with a government guarantee against default in certain circumstances.    The borrower pays a premium of around 2% per annum, in exchange for the government backed loan guarantee. The borrower also pays a normal interest rate which is arranged between the lender and borrower.

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