Author: Miranda Khadr, CEO and Founder of Provide Finance
I have spent many years advising small business owners on the types of finance options that are available to them. Some are start-ups looking for a lump sum to get their ideas off the ground. Others are further along in their journey, looking to secure extra funds to invest in machinery, stock and office furniture as they enter a new growth phase.
It’s always so exciting to be able to play such an important part in helping businesses to launch and grow. Recently though, I’ve been hearing from clients who need to find money just to keep their businesses afloat in 2023 and this is truly distressing as it really hits home the financial difficulties that many of us are facing. One question I am being asked consistently is, ‘should I borrow to keep my business afloat?’ If you’re worrying about cash flow, or you need the security of some cash reserves in the bank, then borrowing could be the answer.
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. There are a multitude of loan products out there with rates and terms to suit all situations.
Would it help to consolidate your debts?
The first thing I would suggest considering is debt consolidation. In simple terms, this means looking at all your outstanding debts, including credit cards, loans and overdrafts. Add up the total and consider taking out one loan to pay them all off. The advantage of this is that you will only have one outstanding debt to pay off, charged at one interest rate, so monthly repayments will be easier to stay on top of and factor into your monthly outgoings and budget. You may also find that you can lower the rate you are paying to service the debt, although if you are increasing the term of your borrowing then you may pay more in the long term. That said, taking a loan to consolidate debts and streamline your borrowing can be a good way of managing your cashflow.
Different types of business loan
This is the most common type of business loan is an unsecured business loan and doesn’t require any collateral against property, inventory or tangible business assets as security. Unsecured loans are quick to arrange as the lender doesn’t need to value or review any assets to approve a loan application. Typically, 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, which allow the business to fix the cost for the term of the loan.
One point to note is that, as unsecured loans do not require the security of collateral, lenders may offer you a slightly higher interest rate to take account of the risk that they are taking on. Most lenders will also require the shareholders/directors of the business to sign a Personal Guarantee, in place of providing asset collateral. You may also have to prove your creditworthiness, so if you’re a business owner with an adverse personal credit record, or your business is making a loss, you may find it more difficult, though not impossible, to find a lender willing to lend to you.
Alternatively, you may want to consider a secured business loan. This type of loan is associated with borrowing larger sums of money, so if you are needing a smaller loan to put cash in the bank or you have temporary cash flow problems, then this type of loan may not be suitable.
If, however, you need to make large value purchases, such as machinery or hardware, to keep your business going, then a secured business loan might be the one for you.
Secured loans require collateral from tangible assets, such as property or equipment of value. Because of this, they can take between 1 and 3 months to complete as the lender has to value, review and undertake a legal process to obtain security over the asset.
Typically, secured business loans come with a lower interest rate but they are subject to other costs such as legal and valuation fees. It’s also important to note that the asset you have secured your loan against may be repossessed by the lender if you fail to keep up repayments.
A secured business loan may need some explaining as the criteria and terms are dependent on many factors so before settling on this type of loan, so you should think about speaking to a specialist adviser who is experienced in business finance.
If you are awaiting proceeds from the sale of goods or property, or you have unpaid invoices yet to be settled, but you need cash in the meantime, short-term finance could be the answer.
Short-term lending is often known as bridging loans as the loan quite literally ‘bridges’ the gap, providing you with a short-term cash injection whilst you wait to be paid money that is owed to you.
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.
What do you need to apply for business finance?
All lenders have their own criteria when it comes to agreeing business finance. However, there are a few standard documents that you may be asked to provide. These include, but are not limited to financial accounts, business plan and forecasts, business bank statements, and an explanation of what the loan will be used for. Lenders will also ask for a summary of any debt already taken out by the business, details of directors and shareholders of the business and information on any adverse personal or business credit history.
Alternative forms of credit available to SMEs
There are also alternative forms of borrowing available to business owners to help manage short periods of expenditure. Business credit cards, for example can be quick and easy to apply for. As with personal credit cards, you can pay a monthly minimum payment for those periods when your cash flow is lean and make overpayments 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.
Another alternative is a business bank overdraft. As with a credit card, this can be quick and easy to apply for and are really useful in emergencies, to pay for unexpected bills. There is no set minimum regular repayment and interest is only payable on the overdraft balance.
However, 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 and, if you fail to repay your overdraft, this can lead to your business receiving an adverse credit report and the bank may decide to withdraw the overdraft facility all together.
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.