From Julie Easterbrook at Enterprise First
“As a business support organisation we’ve helped our fair share of clients with financial challenges. Start up businesses need money to launch their venture; to cover salaries, for materials, stock, premises or marketing costs. It is easy to identify what it’s needed for. However, finding the right source of finance to meet the eligibility criteria can be difficult.”
Julie shares her knowledge of the options available. When they might be used, what you can use them for and roughly how long each take to arrange.
She says “I’d strongly recommend that you shouldn’t overcommit yourself by taking on too much debt. Sometimes a ‘patchwork quilt’ effect of funding can resolve temporary financial challenges.”
Savings, or your own money
It’s good to have your own stake in a business, but sometimes it is better to hold some or all of your savings back as a contingency fund. Rather than using them all upfront and seek other sources of funds for your initial costs. You might have been squirrelling funds away to start your business. It’s worth considering all of the options upfront, and in the context of the essentials.
Releasing some of the equity in a property to set up a business can be risky. Consider very carefully before putting your own home on the line.
Banks won’t normally lend for business purposes on a personal mortgage. They will however take ‘security’ from a director over their property against a business loan. This option can take a few weeks to arrange, as there is some legal work required (and therefore additional costs for arrangement), so weigh up your options first!
If you are looking to buy an expensive machine or equipment there are lenders who will allow you to borrow the money, with the loan being secured against the value of the item itself. Interest rates vary depending on your circumstances. This is often an option for when you’re a little further down the road and looking to invest in your business.
Often used for vehicle finance. The finance company is typically the legal owner of the asset for the duration of the lease. But, the lessee has operating control over the asset. This is great for getting you up and running quickly if you need a set of wheels to get you started! Interest rates can be quite high, so worth evaluating a few different providers
High street banks won’t lend money for a business on a personal loan. However, if you are buying a vehicle to use for business and personal journeys, this type of funding could work for you. Interest rates are usually between 4% – 10% depending on the your perceived risk profile. You can do this online and get instant decisions.
Probably the most well known and assumed route of financing a new business.
Available from pretty much all high street banks and increasing numbers of online finance providers.
Start-up businesses are deemed to be high risk, so most banks will expect you to be able to input at least half of the overall amount needed. They’ll ask you to provide a business plan and a financial forecast covering at least the first 12 month period.
The interest rate can be anything from 4% (usually only with secured loans) to 15% on unsecured loans. If you think this is the best option, be prepared for a longer decision than some other providers – particularly with high street banks. If you need funds more quickly you may want to pursue another route.
Enterprise Finance Guarantee scheme.
Or ‘EFG’ facilitates lending to smaller businesses that are viable but unable to obtain finance from their lender due to insufficient security to meet the lender’s normal requirements.
In this situation, EFG provides the lender with a government-backed guarantee of up to 75%, against the outstanding facility balance, potentially enabling a ‘no’ credit decision from a lender to become a ‘yes’.
You will still need to meet the lending requirements and have some deposit to contribute; plus, you’ll need a business plan and financial projections to illustrate your expected profit. It can take several weeks to obtain funds. High street banks are the main source of these funds.
Government start-up loans
These loans are available to people who have been unable to access business start-up funding from the high street because they don’t meet the criteria or risk appetite of the banks.
Loans available from £500 – £25,000 per director or business partner (maximum of 4 applicants).
They have a reasonable fixed interest rate of 6.2% APR. They are treated as unsecured personal loans. There are different delivery partners for the Government start-up loan which include Virgin, Start-up Loans Co, NWES, but you can only make one application. Typical time scale is 2 weeks from the submission of your business plan and financial forecast to get a decision.
Business overdrafts work the same as an overdraft on your current account.
The bank will agree a specific level to which you can ‘overdraw’ and you can use the funds for any purpose. Interest rates can be quite high – typically 12% up to 23%, charged per day you use it. It’s best not to rely on this option for long term finance needs.
Usually there is an arrangement fee charged, often 1% of the overall amount needed. It’s always better to agree an overdraft in advance of need, as banks don’t like it when you go overdrawn without prior arrangement and will charge hefty ‘unauthorised’ borrowing fees. It’s worth mentioning that bank charges and interest charges can be offset against tax as they are allowable expenses. It can take a week to get approval for an overdraft.
Business Credit cards
These provide a revolving credit option. Similar to how an overdraft works, you are provided with a credit limit which is the maximum. Interest rates are similar. You can avoid paying interest if you clear the whole outstanding sum or you can chose to repay a minimum sum each month (usually 3 or 5% of the outstanding balance).
You can usually have more than one card user and it provides additional flexibility for short term cashflow needs of any nature. Not a good way to borrow long term, but great for short term funding and you’ll get a quick decision with the card despatched and live within a week.
If you buy items or materials frequently, you may be offered or can apply for a ‘trade account’. Often this will mean that you do not have to pay for the item upfront, but can delay the outgoing payment until the end of the month and sometimes longer. Great for businesses awaiting invoices to be paid. Depending on the types of credit checks they do, it can take a week to approve. Not always offered at start-up stage, but often within a few months.
This is a service which allows you to access the value of your invoice before your client has paid it. For example, if you are a service business and your clients are provided 60 days to pay, an invoice finance company can release the majority of the funds immediately.
Depending on which service you choose, either you will then chase the client for payment or the factoring company will. This can effectively plug cashflow gaps. There are charges which vary from one supplier to the next. You’ll need to get quotes from several and understand how each service differs first. If you use the internet search engine you will find many specialist organisations who provide this service as well as high street banks.
Someone may wish to put money into your business in exchange for shares, profit share or a directorship. You will usually need to produce a business plan or ‘pitch deck’ to attract their attention.
It can take a long time to find an investor, but there are numerous websites now dedicated to ‘Angel Investors’, so that you can seek investors for your project. A legal agreement stating when you may be able to buy the ‘angel investor’ out should be considered. This is so you have the option to take back that equity at a future date.
This is the fastest growing type of funding. This is for funding personal and business ventures, plus community projects. The idea is almost like getting someone to sponsor you.
Essentially they are making a donation to help you achieve your objectives. It does involve a bit of effort on your part in writing up a campaign, publishing and sharing it on social media. A horse riding business I know in Dartmoor recently raised £46,000 in this way! There are lots of different websites/platforms on which to publish your campaign, www.crowdfunder.co.uk for example.
- Peer lending
This is an ‘any purpose’ loan where individuals or businesses put surplus funds in a ‘pot’ and applicants can then apply for funding from that ‘pot’. Frequently available to businesses after a period of trading rather than start-ups, so they can demonstrate some trading history. A credit check is conducted on the directors and business.
Funding Circle is one example. Decisions are fast and interest rates are determined on your business risk. Their lending terms are usually shorter than most standard loans ie 12 – 24 months rather than 12 – 60 months, which can make repayment sums quite high.
As the start up scene has grown and matured in the UK so has the variety of the funding options available that can better suit your business’ needs, some food for thought before you go down the usual Business Bank loan route. If you’re interested in finding out more about Entreprise first, visit www.enterprisefirst.co.uk
If you’re a business owner and want to meet other like-minded business owners that may have tried one of these routes, then why not join our next Heelan Hub meet up?