What You Need To Know When Looking For A Business Loan
The media is full of stories about how the banks won’t lend to businesses. But the fact is, you can still get small business loans to start or expand a business.
Here’s some advice you might find useful if you’re thinking about applying for a bank loan:
* Decide how much capital you have, or can raise, without a loan. This will give you a good idea of how much you can borrow – since most banks will base what they will lend you on a multiple of this amount. The bigger lump sum you have, the better loan deal you should be able to get too.
* Are you looking for a loan or overdraft? There’s an important difference. With a loan your borrow an agreed amount of money and pay it back over an agreed period of time. With an overdraft, you can borrow up to an agreed amount of money but only actually use it when you need it. The advantage of an overdraft is that you only pay interest when you are actually borrowing the money.
* Put together a comprehensive and well presented business plan. This should explain why you need the money, and what you intend to spend the loan money on. It should also outline what you expect the likely turnover of your business to be over the loan repayment period, to show that you can afford to repay it. You should also include some background information about you and your business.
Here’s an article you might find helpful when preparing a business plan.
* Know the difference between secured and unsecured lending. Unsecured lending doesn’t require you to pledge any security, but may be limited in amount and will usually cost more in interest.
Secured lending means you’ll have to pledge security, but you may be able to raise more and get a better interest rate as a result. Many entrepreneurs take a second mortgage on their own home as security for business lending. If you do this it’s very important to realise that your home could be repossessed if you don’t keep up the repayments.
* Know the difference between fixed and variable interest rates. With a fixed interest rate the interest you pay will stay the same throughout the term of the loan. With a variable interest rate it will be linked to the Bank of England base rate. If that base rate rises your interest rate will rise, if it falls the rate you pay will fall – although there may be a lower limit.
* Shop around …. thoroughly. Different banks have different loan packages charging different interest rates and having different conditions. It can make more difference than you think …. a percent or two lower higher interest rate can cost you thousands over the lifetime of a business loan.
* Always check the small print. A business loan or overdraft will normally involve arrangement fees, and there may even be ‘annual review’ fees on top. These can add up to hundreds or even thousands of pounds over the years. There might also be an early repayment fee if you want to repay the loan early.
* Consider other methods of raising finance. Taking a bank loan is a popular way of financing a new or expanding business, but it isn’t the only one. Other methods to consider including HP, contract hire, leasing or looking for a business partner to invest.
Here’s an article which explains some other ways of raising the money to start a business.
Finally, very important! The most important point to bear in mind when borrowing money to start or expand your business is whether you will be able to afford the repayments – particularly if your new venture doesn’t go as well as you planned. If in doubt take advice from an independent financial advisor or an independent accountant.