Are Business Loans the only Way to Finance a Business?
For the overwhelming majority of business owners, there will come a point at which they will have no other option than to consider a large capital injection.
For most, this investment will take place at startup and be recouped. Alternately it may be undertaken on a continuous basis as the business develops during the first couple of decades, particularly if you run a public facing service such as a retail store. However, mature businesses may also need some additional capital to stay solvent as well as to expand to reach a larger market.
There's no secret to it. The very best way to finance your business through these initial and transitional periods has always been through your own secured capital, either inherited or acquired.
There are no interest repayments, conditions, red tape, or obligations other than law on money you already own. The more you have, the better, as any potential losses can be absorbed. The trade-off is that the losses are always yours alone.
But what if that just isn't an option?
Considering your Circumstances
Loans are a perfectly routine and respected way to get large amounts of capital for investment quickly. However, you should make sure that a loan is the right method for your business first.
The terms and conditions that come with small and medium-length business loans are usually the most favorable when the size of the business you want to establish is reasonable, offering a service that most people will need, with a good turnover anticipated or proven.
Banks will also be more sympathetic if you are planning a one-time, modest investment or expansion (such as a local, franchised version of an existing shop) after several successive good quarters of trading.
You should therefore take the real and anticipated turnover of your business into account before you apply to anywhere. In assessing your loan, the bank you choose will also typically consider your recent trading history and VAT clearance status as a guarantee.
Whether a loan will be a good source of finance for your business largely depends on who you are, but loans tend to favour medium-scale investment. This sort of repayable debt is a much more realistic option for independent professionals looking to establish a shop or office or for successful small business owners already operating.
In particular, if the debt incurred is for a one-off cost to improve the business (i.e. refurbishment, a lease, or new equipment) a business loan might easily be the right choice.
Potential Problems with Securing a Business Loan for Finance
If your business is already losing money or expects critical losses in the next few quarters, you may have to look elsewhere for a solution or improve trading.
Following the 2008 crash, few banks will agree to underwrite a business that is already struggling with loaned money. For much the same reasons, banks will rarely agree to finance your payroll or other ongoing costs through a debt-based model as it vastly increases the risk of loss.
Your lender will also take contextual risks as well as the state of the market into consideration when you make your loan proposal. If your proposed or existing business runs a known high risk of failure (either through size or the actual product offered) it may be worth looking for outside investors.
Many high risk or low profit businesses find special interest groups (which can include specialist banks), charitable incentives, or government grants a better source of finance instead.
It is worth remembering that anyone in the United Kingdom who is denied a business loan can legally appeal, on certain grounds. Certain reasons for refusal (such as discrimination) are a criminal offence..
Are There Other, Perhaps Better, Options?
Business loans are not the only option out there for starting or expanding a business, with good reason. The best businesses match the lending solution they use to their precise needs.
For business projects that don't fit the normal debt-based model such as technological startups, private equity investors may be a far better choice. You will need to be part of a limited company of three or more people. However, equitable lenders can often provide huge amounts of capital while helping to absorb losses if you run into difficulties.
The main drawback of this funding method is loss of control. Shareholders and stakeholders can, legally, attach far more intrusive terms and conditions as to how you run your business to any financial agreement you might make.
Long-term, this could cost you a lot of money if your product or business is far more successful than anticipated. It could also see you lose control of your valuable intellectual property. It's also more up to their discretion as to how private investors choose to hedge their capital.
For smaller projects (for example, a registered retail business focused on merchandise for one franchise) crowdfunding, an overdraft, or a small personal loan may also be a far more flexible and ultimately rewarding option. If you take a loan for too small a cost, the capital that you make back may be eaten up by incurring an expensive interest repayment that you don't really need.
Smaller debt-based options may also be more appropriate if you're not planning on hiring staff or don't need a fixed premises. If you only need certain equipment for a short time, it can also be far cheaper to rent it. Again, consider the scale of your business before choosing. The downside is that many personal options also incur more personal risk in terms of repayment.
Some business projects, particularly those focused on the arts, may also be falsely perceived as high risk and denied money by more traditional lenders. Banks simply won't have the resources to perform in-depth research into everything they're asked to fund.
Securing pre-pledged money for your product through crowdfunding is often the answer if you have a great, niche business idea but lack a commonly known market. Many websites, such as Kickstarter, offer platforms for advertising your idea.
What to Expect if you Choose a Business Loan
Business loans are mostly extremely similar in nature to personal loans, with a set guarantee period for the cash received and a fixed interest rate in most cases.
In the United Kingdom debt-based business loans can typically be negotiated up to the value of around half a million pounds through private capital lending. Anything short of establishing a major corporation could, feasibly, be funded through the right bank.
However, few businesses borrow this much. A more typical package will offer finance in the range of £10,000-£30,000 for 12-24 months. If your amount falls within that fairly generous window, a business loan is well worth considering. Your lender may be extremely flexible on conditions. Much smaller amounts and longer timescales are common.
If you run into trouble repaying after a set period, the government can offer certain help with your business finances. See gov.uk for more details.