Do you need a loan?
If your business is growing or you need to replace old equipment a loan might be something you need to consider.
So before you go down this route, ask yourself:
1. Could I save for a few months instead?
2. Could you get deposits from customers to help fund new equipment to fulfil orders?
3. Have you spoken to your local enterprise office or council to find out about grants? Often you will not get the full amount, but the relevant authority might match fund, i.e. if you raise £5k they will match this or supply an amount up to £5k. Also, there are a variety of grant schemes for green energy, broadband etc.
After exploring your finances and you need a loan, how do you approach the process?
Understand lenders
Lending is about assessing risk. A bank wants to help people, however, they have a duty of care to reduce the risk of default. Therefore, there are regulations and guidelines banks have to follow. It is never personal.
What a banker does is assess risk. They don't care if you sell 10 or 100,000 widgets. They review:
- Your profit margins
- Your overhead costs - are you wasting money on things you do not need?
- Cashflow - are you collecting cash on sales in a timely fashion?
- Could you scale back some of your plans to do a proof of concept first?
- The overall strength of your business plan
- Your ability to repay - do you have a strong backup plan?
There are other things they will assess and this becomes nuanced on a case by case basis, but the above gives you a general idea. Appreciating where a bank is coming from will help you approach going for a loan in a realistic way.
Plus having a good inward look at your finances might be a much-needed wake-up call to make your business more profitable and improve cash flow.
Credit ratings
Before you even start to apply to banks you need to make sure you have a decent credit rating. Depending on how long you have been in business you may have to apply for a personal loan.
You can check your score with a variety of free tools such as Clear Score, Experian etc. The better your score the better options you have to access low-interest options.
If you have a low rating there are some things you can do to boast your score:
1. Make sure you are registered to vote
2. Make sure your correspondent address is up to date across your bank accounts, subscriptions services, phone contracts, council tax bills etc.
3. Transfer any contracts people are paying on your behalf, into your name. This is common for younger entrepreneurs who have a mobile contract paid for by their parents. By getting it into your name and paid from your bank account you are demonstrating your ability to pay a monthly contract.
4. Consolidate debt to get your repayments down - refer to Martin Lewis, he covers this extremely well on his website (google him:).
5. Get debt. I know sounds ridiculous, but if you have never had a loan or paid a bill the credit rating agencies have no way of measuring your ability to repay. From my own experience, moving from one country to another, you have to start again.
The basic things I did was get a phone contract, registered to vote, paid a utility via direct debit, got a credit card and bought some furniture on financing, Make sure you pay as per the contracts.
Over time you build your score, it doesn't happy overnight.
NB: Make sure when you approach any lender that they do not run a credit check, without your permission. If too many are run in a short space of time it will reduce your score. Some of the so-called 'quick loan' websites will run a report without your knowledge. - Be careful.
How do I apply for a loan?
I have to be a bit general here, apologies in advance, as different industries are treated differently. Plus the longer you have been in business the easier it is to access cheaper rates.
So, as touched upon earlier, there are some key documents banks look for. You will need a business plan and a cash flow showing how the loan will be used in your business.
Try to avoid giving too much irrelevant information. The bank is assessing how you intend to use the money and your ability to repay.
Telling them you have a friend in France who might place an order next year is not a fact. It is not a confirmed transaction and may never happen. Stick to what you can estimate reasonably.
Yes, estimating sales can feel a bit arbitrary, but if you have consistently sold 10 items a month, there is no reason, with some extra marketing to project that figure will increase to 12 items per month. However, jumping from 10 to 200,000 is strength without a £1m advertising campaign or a Kardashian as a friend:)
So be prudent, you might have much higher sales in reality (and great) but appreciate you are being judged based on risk. You need to demonstrate that you can make enough to pay back the loan and have a reserve for bad debts and other contingencies.
Lending options for UK businesses:
1. High street banks & building societies - You don't have to use your own bank. Though it should be your first port of call. If you feel you are not getting the service you need, approach another which is SME friendly (this can vary by town and city).
2. Credit unions- a very underrated option. Credit unions work on a more community basis and therefore will have programs for small business and credit arrangements when things are tight. You have to be a member for a while, but worth looking into.
3. The British Business Bank - Know as the start-up loan company, the British business bank underwrites loans and investments into UK businesses. If you are trading less than 2 years and need up to 25k of lending. https://www.startuploans.co.uk/ You might see other similar schemes, guess what, it is the same loan scheme:)
However, a common myth to burst - it is not guaranteed money. It is taxpayers money so obviously, there is a high level of responsible lending procedures to follow.
The other players
There are far more companies out there offering peer to peer lending, very high-interest options veiled in the promise of instant cash and crowdfunding.
What may appear quicker and easier could cost you far more in the long run (and really damage your credit rating if you miss a payment). If you can hold off a month or two you could work on your business finances and personal credit rating to put you in a better position.
Final thoughts
Hindsight is a wonderful thing. This is not a criticism of new businesses, but a tendency is to focus too much on chasing sales and not dedicating an hour or two a month to getting the finances in order.
Setting up strong foundations from the start will make expanding and growth far more affordable in the long run.
Therefore, try to avoid leaving things to the last minute. Invest a few hours a month reviewing your cash flow and evaluating the demands on money to sustain and grow the business.
