Small Business Loans

Do You Need a Business Loan to Get Your Company Started? - Before you apply for a loan, you should should first determine how much money you need and for what purposes. The calculation should be based on your budget for fixed business startup costs, plus the continuous variable expenses during the loan period. There are many online loan calculators to help you work out the overall costs. When a lender reviews your loan application, they will want to calculate your ability to service the debt. The small business loan, needs to be large enough to sustain business operations through the first year. During this time, startups have to generate new business clients to build customer loyalty and trust. So ask a qualified accountant, to help construct a cash flow forecast that highlights the effect of loan repayments on your business. This forecast should also include a detailed sales forecast to understand the break even points each month.

A small business loan product is designed to support the short to medium-term financing requirements of start-up firms. The loans usually have a pre-agreed repayments periods. Repayments options include a fixed or variable interest rate. Some loans also have an early repayment penalty clause - so don't forget to check the small print! Some lenders will also charge an arrangement fee during the application process. A typical 3 to 5 year small business start up loan will help pay for overheads like premises, salaries, marketing, computers, stationery and stock.  For large loans that involve investment in plant and equipment, a 'term loan' is used to finance capital investments, that is expected to be recouped over a long term period.

There are two main types of business loans, Firstly, a secured loan is usually secured over an asset of a company (such as buildings or land). Secured loan providers want to ensure their order of repayment is high, in case the creditor goes into administration. Banks like taking property as a form of security, because property tends to hold its value. Banks would normally use a loan to value ratio of between 70% and 80%. Banks will insist upon some form of security or personal guarantee for larger loan amounts. Any property given as security (which may include your residential property), may be repossessed if you do not keep up repayments on your mortgage or other debts secured on it.

Secondly, an obtaining an unsecured loan means there is no need to put up any security for the loan i.e. it is unsecured. The interest rate tends to depend upon the applicant's credit score rating. An impaired credit history, may determine an individuals ability to borrow. Unsecured loans are typically short-term and are expected to be repaid within a few years. The repayments are usually charged on a monthly basis, so the borrower can budget their repayments.

In this difficult economic climate, securing a small business loan is becoming increasingly difficult for entrepreneurs. The impact of the credit crunch has reduced the number of products on the market. This is especially true, for businesses or owners with an adverse credit history. Lenders have tightened up their lending criteria to mitigate defaults. Most business owners choose to apply to their own high street bank. In addition, an increasing number of women, returning to work following raising a family, will not have the same credit history, to assist in the credit checking process.

Another important consideration, is to decide how much personal risk and control of the business, you are willing to sacrifice. If high street banks reject your loan application, it is possible raise additional capital by selling an equity stake in your company, to a venture capitalist or new business partner. A new partner may bring invaluable business skills and advice, alongside new investment capital. However, a venture capitalist will want a large proportion of shares in return for their investment. The greater the equity sacrificed, the more likely shareholders will demand greater control in key management decisions. In addition, if a shareholder feels a Director is not acting in their best interests, they may have the right to call an extraordinary general meeting, to put forward a vote to remove that Director.

Where Can You Obtain a Small Business Loan? - The main sources to acquire a small business loan are as follows:-

Firstly, a qualified Independent Financial Adviser can provide seasoned financial advice plus a 'whole of market' view of interest rates from all market sources. An IFA will be able to explain the pros and cons of obtaining business debt. In addition, an IFA can provide an unbiased opinion on your particular business circumstances. IFA's must pass relevant exams to advise on specialist subject matters. The face-to-face meeting with clients' involves a detailed fact-finding survey of the clients needs and requirements, to recommend an appropriate financial product.

Secondly, 90% of small firms use high street retail banks to obtain a business loan. Banks will charge an interest rate that reflects market conditions, the individuals creditworthiness, and the amount of risk attached to the business proposal. Banks will look at the overall collateral of a borrower, to check the security covers the loan amount. Thirdly, loans can be obtained from a regulated specialist commercial finance broker. They tend to provide a custom and face-to-face solution, and can also help refinance existing commercial debt. Most will need a large residual in any equipment that needs financing.

Thirdly, the cost of loans can be compared using an online comparison website. Financial 'aggregators' provide the ability to compare lender interest rates, assess details of product features, view total costs, and even submit an online application form.

Lastly, the Small Funds Loan Guarantee Scheme is operated by specialist institutions, to provide capital for businesses that have failed to secure a loan from major high street banks. (SFLG) provides lenders with a Government backed guarantee against default in certain circumstances. The borrower pays a premium of around 2% per annum, in exchange for the Government backed loan guarantee.

We hope this brief business guide has got you thinking about issues to consider when applying for a small business loan.