Starting a new business is an exciting time. But the cost of raw goods, premises, technology, insurances and more can add up – so it’s little surprise that one in five small business owners say access to capital is their greatest pain point.
This means that obtaining funding is a vital step for many business owners – and one that can make or break the business. There are a lot of options out there, however, and choosing which one is right for you isn’t a decision to be taken lightly.
Before jumping in, you’ll need to consider your own financial circumstances. Start by considering how much you need to borrow, what you need the money for and how quickly you can pay it back.
While there are a variety of ways you can fund your business, including angel investors, raising money from family and friends or using your own savings, these are three of the more common options.
A business loan is capital provided by a lender, such as a bank. In exchange for the money, lenders need to repay the principal with interest, plus fees. It’s an approach that gives you control over the business direction and its finances.
A business loan comes with either a fixed or variable interest rate, and can be secured (against collateral such as a house) or unsecured (which isn’t guaranteed). They typically require regular payments on a set schedule, but repayment terms and interest rates can vary, so it’s worth shopping around.
Plenty of small businesses use a business-specific credit card, which helps to separate their business and personal finances. While credit cards are often associated with high interest rates, they give you the option to finance a purchase without paying any interest if you pay back the full amount from the business turnover before the interest kicks in.
If you’re applying for a new credit card, some offer a grace period before your first payment is due, which can sometimes be as much as 60 days; this can be a useful source of financing. They may also come with business features and rewards.
If you’re considering a credit card as a low-cost financing option, bear in mind that credit card features vary greatly, so shop around before signing on the dotted line.
A business overdraft is a line of credit offered when you make a funds withdrawal that’s greater than the balance of your business account. This is a pre-arranged form of funding provided by your lender.
Having an overdraft allows you to continue to make withdrawals even if your account is empty, giving you flexibility in your cash flow. It means you can pull out extra funds if your business has had a lower trading period, or it can be used to fund new equipment needed for your business.
Obviously, just like the options above, whatever you spend needs to be repaid, and interest will be charged based on how much you spend. Fees also apply.
Deciding which option is right for your circumstances takes a bit of consideration. Here are a few pertinent questions to ponder in your decision-making process.
Is it the right time?
There’s often a right and a wrong time to borrow. Take the time to understand what’s happening in your broader sector so you can decide whether it’s the best time to seek out a loan.
What’s my turnover?
Understanding how much your business is earning and the costs involved in running your business will help you understand your financial shortfall.
Where are my peaks and troughs?
If you’ve been in business for a year or more, looking over the financials for a full year will help you understand when your business earns more and when turnover drops. It’s important to understand whether you’re wanting to borrow to fill those shortfalls, as this will help you work out your ability to repay the loan.
What’s my credit rating?
While people are increasingly aware of the importance of personal credit scores, business credit scores are often overlooked by business owners. Consider taking out a small loan you’re certain you can repay, because building your credit score as a business can help you get better rates on future loans.
What are my growth projections?
If you’re on the path to growth and need funding to funnel into a new market or product innovation, make sure you’ve done your due diligence before borrowing.
What will it cost to grow?
Growth can cost money, both in terms of additional equipment, research, and marketing to get the word out there, and in terms of hiring staff to handle the additional workload that comes with growth. Make sure you understand the costs involved before you borrow.
Getting your funding approved
If you’ve decided that borrowing is the right approach for your business, and you know the funding option that best suits you, there are some things you can do so that you’re more likely to get approved.
Check you are eligible. Confirm that you meet the eligibility requirements before you apply for funding. These will vary between lenders.
Track your turnover. How much your business is turning over right now and whether you have financial projections for the coming one to two years can influence a lender’s decision.
Have a plan. Make sure you document how much money you need to borrow, what it will be used for, when you can pay it back, and how you’ll do so.
Keep records. Lenders will be more inclined to approve your loan if you’ve kept good financial and business records in the past that you can produce upon request.
If you’re considering taking out a loan, it’s wise to ask your business accountant for some independent advice. They’ll also be able to help you prepare the information you’re likely to need to present to your lender.
Good luck with the process. Funding your business is a big decision but an important one – and choosing the right option will hopefully get you one step further on the road to success.