Since the recession hit, banks have become notoriously stingy when it comes to lending to small businesses, at a time when the economy needs enterprise more than ever to get back on its feet. At the same time, many professionals who have been made redundant now want to start their own businesses, having been presented with a harsh job market and a sudden opportunity to make it on their own. If you’re about to make the leap into the world of small businesses, make sure you read our top tips before you start looking for capital.
1. Finding the right funding
Most people entertain a similar train of thought when looking for capital to start their business. Rather than borrowing from a bank, they turn first to friends, then family, then founders (i.e. themselves and their business partners), and then banks and investors. There are other ways, however, if none of these are suitable.
First, there are ‘business angels‘. These are informal investors, often retired executives or entrepreneurs with a great deal of capital and a lingering taste for more money-making. Rather than demanding collateral, business angels normally invest in return for a share of your business profits. The average investment amount in these cases was around $450,000 in 2007, and business angels are looking for companies that will grow, rather than simply sustain their MD.
With no business angel in sight, you might turn to business schools or other further education establishments for cash. These institutions often have incubator schemes, which lend modest sums to startups and provide valuable advice too. The money they provide often comes from venture capitalists, serving as a friendlier middle man between you and the big lenders. If that doesn’t suit your business either, there are a range of government grants out there to support new companies.
2. Finding the right bank for you
If you do choose to go with a loan from a bank, which is the most common form of raising capital, it’s important to find a sympathetic lender, preferably one with which you have an existing relationship or line of credit. If you have been using the same bank for your current and savings accounts for a few years, your first port of call for a business loan should be that one. If your bank doesn’t offer the right kind of loan for you, or doesn’t have a good enough deal, find a bank with experience of the trade or industry you are working in.
3. Shop around
In banking today, you are a customer, so behave like one. Don’t jump at the first offer a bank gives you and simply be grateful; exercise your ability as a consumer and look around. Get a quote from three or four lenders if you can to make sure you are getting the very best deal.
4. Protect yourself
The bigger a loan is, the greater the need for negotiation and care when entering into a contract. Before you sign anything or accept any deal, check it out with your financial advisor (if you don’t have one already, get one; they are often free) and if you can, with your attorney too. Ensure, with their advice, that the terms and conditions of the loan will not be ruinous to the business should something go wrong.
5. Think about collateral
Banks are more likely to lend to your business if you have something valuable to secure the loan with. In most cases, property is the best kind of security, and many business owners use their business premises or even their homes as security, but before doing this, make sure your business plan is watertight. If you can’t face the chance that, if you fail to meet repayments, you may lose your home, office or workshop, don’t sign on the dotted line. If you have no business premises and cannot use your home as security, banks then look at other assets you may have, such as a fleet of cars or any expensive equipment you have for your business. Again, make sure you will be able to meet repayments before using your assets as security; losing them could mean losing your livelihood.
If you have none of the above to use as security, you may be able to get an unsecured business loan, although, given the credit crunch, this has become even more difficult than ever. Be prepared, if this is the option you go for, to pay more for your credit; with the increased risk of losing money as you have no collateral, banks will charge higher interest rates to make sure they get their money’s worth from your loan.
About the author
Rachel is a freelance writer who writes about saving money, earning more and building wealth for a 100% free-to-use credit card comparison service where you can compare, review and apply for a business credit card for businesses located in Australia.
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