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It might not be your first choice for setting up or expanding your business, but taking out a business loan isn’t quite as stressful as you might think.
There are lots of options for you to consider, and as long as you have done all the necessary research and business planning, there’s no reason it can’t be a great next step in the life of your business.
Why Do You Get a Loan for Your Business?
One of the first questions business owners need to ask is they need a business loan. What exactly is it that you require additional funding for, and what is your end goal?
There are numerous reasons why you might want to secure funding for your business, and it’s not up to anyone to tell you why you should or should not go for it.
If your business has been trading successfully, or even just starting up, it may be that you need a further injection of cash to help you reach your full potential. These are some of the main reasons small and medium-sized enterprises take out business loans.
While you might have experience and expertise in a specific area of business, or in your chosen industry sector, it’s highly unlikely you know everything there is to know. And even if you do, it’s highly unlikely you’ll have time to do everything yourself.
While this might be easy in the initial steps of setting up, it will become progressively more difficult as the business gains traction and starts to grow. While you might be tempted to work on your own, it can be worth every penny spent to employ someone who can take care of the office, admin, paperwork, and anything else you have for them.
Not only does this free you up to concentrate on the day-to-day work, but it can save you from getting yourself into a mess further down the line. The IRS isn’t that forgiving when you tell them you didn’t have time to file your taxes or complete paperwork because you were too busy. It’s just not an option.
While many small businesses start off working from home, once a business grows and expands, it can be a natural next step to secure a property. This doesn’t have to involve purchasing a unit – although obviously, it can – but it can be as much as securing a lease on an appropriate building and putting down security deposits.
This can be a pretty expensive business for a new business, but equally so for one on the rise. It’s very common for businesses to approach lenders when this time comes, and securing funding can help to launch the next phase of your business from a shiny new office or workshop.
While many businesses start off on a tiny scale, expansion can bring costs that are necessary to move to the next stage. Having an inventory that you know you will use (based on future orders or projections) can help you taken on bigger clients and projects than not having one.
Having the ability to buy or lease cars for staff, vans, or any type of vehicle, can also help to boost your business identity and brand.
Having the funds necessary to cover your outgoings until your profits rise is a regular worry for small and medium-sized businesses. Depending on your industry sector and the nature of your work, taking out a loan to cover this might very well be a good option.
If you, for example, have a long lead-in time for the payment of invoices, doing work and waiting a month or two to get paid can actually put your business out of business. The last thing anyone wants is to fail in their enterprise simply because the working capital wasn’t in place.
What do I need to do?
There are various things that lenders – specifically the bank or business investment agency– will look for when it makes a decision about agreeing to business loans. In the first instance, they will look at the age of your business and your trading history.
If you’re a small business with no real trading history, you will be expected to have a full and robust business plan and a full set of financial projections. These will be in-depth for the first year but potentially cover profit and loss for an additional four years.
This will give the bank a picture of what you do, where your costs lie, and what you project to make from the venture. Although the figures are of paramount importance, so is the written text of the plan.
You must convince a lender that you are worthy of funding, and you have fully researched your market, your customer base, your competitors, and know your business inside out. Lenders want to know that you have fully considered how you will spend the money and how you will pay it back – with interest.
What is considered?
Your targeted lender will look at every aspect of your business. However, there are a few key areas in which they will look for you to have done your research and be able to fully explain your position and future goals. Initially, your credit score might be taken into account.
This is particularly important if you are a sole trader or partner and will be personally responsible for any funds borrowed. In a limited company, the lender will be more interested in what collateral the business has to potentially secure against the borrowing. It’s important that all business assets are noted in your financial projections.
This can dramatically reduce the risk on behalf of the lender. As we mentioned before, your trading history will also be important as it gives the lender a steer on how your business is run and can flag up any potential problems.
As part of your financial projections and plans, you will be required to furnish your potential lender with details of all outstanding accounts and debts in the business name. This will give a picture of your industry and how good you are at recouping funds owed to you.
It’s always a good idea to ensure all your business insurances are up to date and you can evidence the policies. Again, this does help to reduce your risk and that of your lender.
Although great importance is put on your financial situation, it’s equally important that a lender knows you have a handle on your market. You need to be able to show you have a marketing plan and customer retention strategy.
Without being able to detail who your target customers are, where these people are located, and how you stack up against your closest competitors, you run a serious risk of not being taken seriously or being turned away and told to do more homework before being considered again.
Business loans are a stable and secure way to expand or improve your business, but they’re not the only option available to you. Another option to consider when you’re conducting your research is a merchant cash advance.
As opposed to a loan, which is agreed on a fixed rate and term, a merchant cash advance is based on your lender taking a percentage of sales. Merchant cash advances are not a banking product.
They are generally offered by a financing company, and money is offered in exchange for a percentage of your debit or credit cards sales. Fees are also attached to the deal. There are various factor rates, depending on the lender, and these do vary widely.
Merchant cash advances are not classified as loans, but rather as sales. Instead of paying back the money over a set period of time, an MCA is paid back at a percentage of sales until the money has been cleared.
There are many advocates of this approach, but like any third-party involvement in your business, it comes with its own set of unique risks.
Another alternative to a business loan is gathering money from friends and family. While many people don’t like mixing business and pleasure, it can be a much cheaper way of injecting cash into your business without worrying so much about interest rates.
That doesn’t mean you shouldn’t formalize an arrangement for borrowing money from your family or close friends because you definitely should. You want to ensure you; your business and the other parties know exactly what’s involved.
Either draft up an agreement yourself with all the relevant details, including the amount borrowed, any interest, and your repayment plan, or take it to be formalized by a solicitor.
If you have a business that has immense potential or is in a specialist sector, you can also harness the investment potential of a business angel.
This is a person who has an interest in investing in new or growing businesses. They will invest a sum of money into new product development or something similar in return for a stake in your business or the promise of a substantial return on their investment. These can often be found through your local bank or chamber of commerce.
Whatever you choose for your business, if you’ve done your research, there’s nothing to stop you from taking your business to the next level and making a real success of it.