Small business loans and capital sorc

First Name:

Email:

Small business articles, ideas, grants features, how-to's for entrepreneurs. Click here for details

	Small Business Services
	Small Business Advice
	London Accountant

Small Business Resources

	About Us
	Links
	Excel Templates And Business Plan Templates
	Business Name Idea
	Starting A Small Business Marketing On The Internet
	Site Map

Search for A Government Grant or Business Loan

SMALL BUSINESS LOANS

Small business loans and overdrafts are the most common form of financing available to owners of small businesses. Used properly, they provide a simple and effective way of starting your own business. Referred to in the UK as business start up loan. Small business loan can finance the growth of your business!

But despite their widespread use, they are not always used wisely. Many businesses make the wrong choices or incur unnecessary costs. At best, this raises the cost of financing (monthly obligation to meet interest payments).

Small business loan should not be confused with small business loan grant. Grants are given freely, without obligation to repay the grant and a loan is a legal contract, obligating the borrower to repay principal and interest.

Advantages of Small Business Loan

The biggest advantage of a business loan is the fact that you can bank on having the money.

You will need to provide a business plan. Writing a robust and detailed business plan is a sure way of you being taken seriously (you can download business plan and marketing plan template from our
Business planning page

Once you have arranged a loan, the financing is secured for the life of the loan (unless you fail to meet your obligations, when penalties may apply).

If the purpose of a loan is to purchase business assets, you can match the term to the life of the asset. For example, you can match the purchase of a machine that will have a working life of five years using a five- (or shorter) year loan. By the time the machine is obsolete, the loan would have been repaid.

You maybe able to tailor the loan to match the cash flow of the project you are using the loan to finance.

For example, a 'capital holiday' allows you to defer making any capital repayments for an agreed period after taking out a loan. An 'interest 'roll-up' allows you to defer interest payments, which are then added to the amount you owe.

Business loans, whether for small businesses or not, may be secured or unsecured, depending on the amount of the loan and risk factors associated with the borrower, purpose of the loan and other business/financial risk factors. The higher the risks, banks generally require security.

To secure an Unsecured loan, your case is helped where you have assets (personal or business) valued in excess of the loan required. Even then the bank may require some kind of guarantee.

You can usually fix the interest rate of the loan.

You may be able to get a special loan.

Disadvantages of Small Business Loan

The disadvantages of a bank loan, whether a short term loan or otherwise may include lack of flexibility.

You pay interest on the full amount of the outstanding loan.

Banks often imposes legal binding covenants before agreeing to a loan. For example the bank may insist you keep the overall gearing (debt/equity ratio) below a certain level. If you breach these conditions, the bank will be entitled to immediate repayment.

You don't have access to the portion of a loan you have repaid, unless you apply for a new loan.

The bank normally require a fixed charge or some form of security.

Minimising the cost of a small business loan

Do what you can to improve your credit score (rating).

Most banks evaluate business using a process of credit scoring. While each bank's system is different, they tend to focus on:

How good your security is.

How low your gearing is and how strong your balance sheet is.

Putting more share capital (or unsecured director's loans) into the business may reduce the interest rate margin demanded by the bank.

What your cash flow projections are. Your cash flow projections should be credible, and should demonstrate that you can comfortably meet interest payments and loan repayments.

Your past banking record.

Your business's past financial performance.

How professional your business plan is. This includes credible commercial plans, not just profit and Cash flow forecast (see writing a business plan).

How expensive the financing will be for the bank to administer. If you have other small business loans and personal loans, it may be cheaper to consolidate all your borrowings with one bank.

Finally, ask the bank to calculate and itemised the total cost of any overdraft and loan offer:

The total amount you will pay over the life of the financing provides a rough guide.

For a business loan, the total cost of interest and all charges can usually be expressed as an Annual Percentage Rate (APR).

These figures make it easier to compare different offers.

Shop around, including alternative forms of finance.

Then negotiate for a lower interest rate and lower charges (even if you only received one offer of finance).

A bank is usually more willing to improve its offer if you have other quotes.

Your negotiations are more likely to succeed if you have a good relationship with your bank.