By Miranda Khadr, above, Founder, Provide Finance
Encouraging data from QuickBooks recently has revealed that, despite worries about a recession, 1 in 3 UK adults (34%) are planning on setting up their own business in 2023. This is incredibly positive news – after all, small businesses and entrepreneurs are the lifeblood of the UK economy. It’s not uncommon for innovation and creativity to emerge from financial ashes. From the crash of 2008, start-ups such as Airbnb and Groupon were born, so if you’re one of the 34%, then I would say ‘go for it’…but not without some thought as to how you’re going to fund your new venture.
Perhaps you’re one of the 70%, according to QuickBooks, planning to use their savings to pay for their start-up costs. It’s worth bearing in mind that in the current climate of high inflation and rising energy bills, your money may not stretch as far as you’d like.
Recent research from Spanish tech company, Glovo revealed that two-thirds of SMEs surveyed in the UK are currently in ‘survival mode’, worried about the cost of living crisis, inflation and lower consumer spending having an impact on their balance sheets. So whatever savings you have will need to be spent wisely to make them stretch further.
One alternative might be to borrow money. There are numerous options available to small businesses including loans, business credit cards and overdrafts to name a few.
With so many options available, the first thing to do is to have a plan. Questions you might want to think about are:
- What do I need this money for? Be specific – not just ‘computer equipment’ but ‘£x for a new PC, £x to update my WiFi access, and £x for a company mobile phone’. This will give you a good idea of how much you realistically need versus what you think you need. You’re also more likely to stick to the budget if you’ve already done the research about what you specifically need.
- How much can I afford to borrow? You will need to repay any borrowings with interest. Depending on the product, repayment terms will vary, so you need to be realistic about how much you can afford to repay every month. Luckily, there are some excellent independent advisers available who specialise in arranging finance for small businesses, and I suggest you speak to them first. They will be able to do a deep dive of your personal and business finances to work out how much you can afford to borrow. Not only that, they will have access to 100s of lenders on the market and knowledge of the various products available, so they will be able to guide you towards the right product and lender for you.
- Do I need a long-term or short-term product? The idea of borrowing money may be a tricky concept for some, particularly those who have never or rarely had credit before. If you are one of these people, you may be keen to repay any borrowing quickly. If so, maybe a short-term product is for you. However, if you need to borrow a larger sum, you may prefer the option of spreading payments over a longer period to make it more affordable, so a long-term product might be better. Again, this is something that a business adviser can help you with and will very much depend on how much you want to borrow and your appetite for borrowing.
- Could I just go to my local bank? Going to your local bank is one option but they don’t always offer the best rates or terms. There has been much innovation around business finance in recent years, driven mainly by challenger banks and specialist lenders, so I would definitely consider shopping around rather than going straight to your traditional high street bank.
Some of the lending products available to small businesses are:
Unsecured and secured business loans
Unsecured loans are quick to arrange – usually, the money can be in your account within 3 to 5 working days and the funds can be used for a variety of purposes. The loan amounts are typically between £5,000 to £500,000 and lenders offer fixed term interest rates, giving you the security of knowing how much the repayments will be every month for the term of the loan. Great for those who like a monthly budget. As the loan is unsecured, you won’t need to provide the security of collateral to borrow the money, but you may need to prove your creditworthiness. Collateral can be equipment, property or any other tangible asset of value.
Secured business loans are a little more complex and can take longer to arrange as the assets that you provide as security have to be valued by the lender. So, if you need a quick line of credit, then a secured loan might not be for you. However, if you need to borrow a large amount, for example to buy plant or machinery, and you have assets available as security, then a secured loan might work for you. It’s important to know that if you’re unable to repay the loan, then the lender has the right to take possession of the assets you provided.
Short-term ‘bridging’ finance
If you’re in the process of moving to new premises or you’re looking to buy property as part of your business, and you need the funds quickly to complete the purchase, then a bridging loan might be your answer.
Bridging loans quite literally ‘bridge’ the gap, providing you with a short-term cash injection whilst you wait to be paid money that is due to come to you, for example from the sale of an existing property or assets. A bridging loan can be quick to organise and the money could be in your account within 48 hours. However, it will be secured against a tangible asset, most likely a property, so there is some risk. On the flip side, this does mean that business owners can arrange to borrow a significant sum but, because bridging loans are meant to be short-term, you will be charged a higher interest rate and the loan may be subject to an arrangement and exit fee.
It is fundamental to know how you will exit a bridging loan as without knowing this you could be exposing yourself to higher rates for longer periods of time, that are not affordable.
Business credit cards and overdrafts
Business credit cards and overdrafts can be helpful for those periods when you are perhaps temporarily a little short on money and need a ‘cushion’. They are generally quick to apply for and are really useful in emergencies, to pay for unexpected bills. Business credit cards provide the flexibility of monthly minimum payments for those periods when your cash flow is lean and overpayments for when you have more cash available. However, as there is no set term, it can be difficult to pay off the balance on your credit card and so you end up paying the debt off over a lengthy period which can cost you more money in interest.
Overdrafts generally don’t require a set minimum regular repayment and interest is only payable on the overdraft balance. It’s important to note that overdrafts can be subject to higher interest rates than business loans, and if you go over your agreed limit, you will incur significant charges. There may also be an annual charge to pay.
As with all significant financial decisions taken on behalf of your business, I would recommend seeking out the advice of a professional finance expert who will be able to provide you with all the options available and help you to make the right decision.