What to Know if You Need a Business Loan

Raising finance for your business can be a tough challenge. However, there are a few options available to you to help you secure the cash injection you need. While borrowing from friends and family is a great option, if you have it, a lot of businesses turn to their banks in order to take their hard work to the next level. This is a quick guide to what you’ll need to do.

What will you do with the money?

There are countless reasons for a business to seek funding. This usually depends on whether the enterprise is brand new and trying to get established or whether it’s already established in the market place. For new businesses, it could be you need money for working capital. For an existing business, you might want to expand your market or provide new products and services. These are the most common reasons SME's take out a business loan .

Staff

You might not need anyone’s help straight away, but if your business does well, and you’re up to your neck in orders and invoices, you might well need to take someone one to help you out. On top of paying a salary, there are other considerations. You may have to contribute towards insurance for health and dental, or have a pension plan. It depends on the business and how many hours you have staff for, but paying wages is only a part of the overall expense of having staff. However, although it can be an expensive business, it can be invaluable to have someone on your side to take care of the things you don’t have time for. It can be a great asset to your business to find someone you trust enough to give the responsibility. It’s not uncommon for startup businesses to report spending 12-15 hours a day working, so having someone else on board can save you from burnout in the first few years.

Property

Depending on the nature of your business, you might well find that a business property would suit you. This could be an industrial unit, store front, office space, or even just a serviced room in a startup incubator unit. Regardless of what it turns out to be, taking on business property can be an expensive business. Not only do you have to pay a deposit and then monthly payments (depending on leasing or buying), but there’s also the associated insurances. Unless you have a serviced office space, there’s every chance you’ll have to kit out your new office space with equipment and furniture.

Inventory/Vehicles

There’s no denying that a liveried business vehicle can be a great marketing asset for a small business, as can company cars with magnetic window stickers of vinyl on the side. They do come at a cost, though. It’s a regular business loan request to ask for funding to hire, lease or purchase vehicles for business use. In terms of inventory, you will need a good supply of stock if you’re selling from a store-front, but also stocks if you supply repair services, or something of that nature. It can be expensive to buy a whole load of stuff before the business starts as there’s little money come in at that stage. This is where a business loan can come in very handy.

Working Capital

A lack of working capital can be the death knell for small businesses when they can’t meet day to day payments, despite having great products and services. It’s a hard blow to take when the only reason a business fails is a lack of money in the account to tide it through seasonal lows or invoice payment terms. Having enough working capital is essential until your profits start rolling in, and this is a common reason for small and medium sized enterprises to approach their bank manager. As long as you can show what you need it for and it’s all accounted for in your projections, your bank should be willing to talk to you about it.

How do I get a loan?

Your bank – or any lender – will want to see a full business plan and financial projections. It is this comprehensive plan that gives them a full picture of your industry, your business, and you. It will show how well you know your business, customer base, market, and overall economic situation. As well as a marketing plan, competitor’s analysis, and a general overview, the business plan should also contain 3-5 years’ financial projections. This shows you have studied the market and have made estimated on how many sales you can make and how much profit (gross and net) you expect from your business in the future. Basically, it should answer any questions the lender has about your business. In addition, it’s pertinent to add the amount of money you’re asking for and include this and the repayment (and interest) into your projection. This shows the bank you have all bases covered. With this in place, you can contact the bank and make an appointment to discuss funding. If you have an established business, also take along previous accounts.

What is considered?

First off, the bank wants to know what you want the funding for and if you have the facility to pay it back. You must be able to answer all their questions and account for all the money you’re asking to borrow. The bank may look at your personal credit score to get an idea of your financial situation. This is relevant if you’re in a partnership or are a sole trader as financial responsibility is personal to the person. As a limited company, business assets will be valued and perhaps also some personal assets, should you need to secure these against your lending. This can help to reduce the risk on the part of the bank. If you then fail to repay your loan, they can make moves to claw back the money through your assets. This is obviously a greater risk for you, but it can make the difference between obtaining funding and not. Another major part of your business the bank will monitor is how good you are at invoicing, and quickly money comes into your business account. If you’re sloppy with your invoicing or have large sums owed to you, that won’t be viewed too favorably by any lender, so it’s essential to have a system in place to sort this out.

Alternative Options

Although business loans are a common way to find additional funding for your business, they are not the only option available to you . Another source of potential funding is through a merchant cash advance. These work differently from loans they’re not fixed term, and they aren’t based on repayments and interest. MCAs are offered by finance companies and are provided on the basis of giving up a percentage of your debit or credit card sales until the amount borrowed (plus the fee) is paid off in full. It also comes with its own set of risks, as with a business loan, but it’s definitely something to consider if you need funding for your business.

If you are an industry specialist, or are involved in a business likely to grow quickly, you may be able to access funding from a business angel. These are existing business people, who tend to have specialisms in specific areas and are interested in investing in high-growth startups or expansions. Funding can run very high, but can also come at a cost. This usually involves a percentage of sales, or a percentage of the company, in return for the initial investment. Angels generally look to make money from investments, so it’s not just a case of borrowing a fixed amount and paying it back.

A further alternative to a traditional business loan is borrowing from friends and family members. It can often be cheaper than the bank as many will charge no interest. It can, however, bring a bit of tension to relationships. Any agreement needs to be set up properly and gives clauses for early repayment, or avenues to take if funds cannot be repaid. Always ensure you have a contract in place to protect you, your business, and the person you’re borrowing from. All parties need to know exactly where they stand. This agreement can be formalized by a solicitor, should you or the lender feel it’s necessary.

Summary

Making a decision on sources of funding for your business can take a bit of time and a lot of research. However, they can be the pivotal stage of business growth, and the boost your business needs to step up and make it to the next level.