Raising finance is a necessary part of owning a business with 89% of business owners expected to borrow money this year.
Choosing the right product to suit your needs is an important step in the process and is crucial to the financial well-being of a business.
In this guide, we break down the options available, how to choose the right finance product and some key considerations before borrowing money for your business.
- 1 What Products Can Be Used To Raise Finance For My Business?
- 2 How Do I Choose The Best Business Borrowing Product?
- 3 What Are The Key Considerations When Borrowing Money For My Business?
What Products Can Be Used To Raise Finance For My Business?
There are several options available to business owners who are looking to raise finance, they are:
Unsecured Business Loans
Unsecured business loans allow business owners to borrow money in much the same way as a personal loan works.
Unsecured business loans involve a lump sum being borrowed, which is then repaid through regular monthly repayments.
While these loans are unsecured, you will usually still be expected to provide a personal guarantee, meaning you are personally liable for the debt should you default.
Business revolving credit facilities allow you to borrow and repay funds as required, as long as you stay within your agreed limit.
The most common revolving credit facilities for businesses are overdrafts, business credit cards and standalone revolving credit facilities.
Revolving credit is usually offered on an unsecured basis, again, with a personal guarantee being required in most cases.
Secured loans are a type of loan which is secured against a property – either your home, an investment property or your business premises in most cases.
Secured loans allow you to use your property as collateral and borrow more than would be possible using a personal loan.
When securing a loan against your property, especially your own home, you should look to get advice from a reputable secured loan broker.
However, it’s important that you carefully check the fees due for their service, as some offer fixed fees (such as ABC Finance who charge £995), whereas many others charge a percentage of the loan, which can run into the thousands.
Commercial mortgages are much like a residential mortgage, which would be taken on your own home.
For a business which owns its premises, the owner can refinance the property using a commercial remortgage to release equity.
Commercial mortgages can take a long time to arrange, with many applications taking upwards of 2 months, so they aren’t the best option for those who need funds in a hurry.
In this situation, it may be worth considering a bridging loan.
How Do I Choose The Best Business Borrowing Product?
When choosing a business borrowing product, there are several factors to consider:
- How long you need the money for: If you wish to borrow the funds over a term of 8 or more years, you should consider secured borrowing such as a secured loan or commercial mortgage.
- Your creditworthiness: Lenders will consider your creditworthiness when deciding whether to approve your loan request.
If you have a strong credit score and financial history, you may be able to qualify for more favorable terms.
- Whether you’re willing to offer collateral: If you’re willing to offer the lender a legal charge over your property, you may be able to get a better deal.
- How much you can afford to repay: If you’re keen to keep your repayments down, you will need a product that offers a longer loan term and low interest rate.
What Are The Key Considerations When Borrowing Money For My Business?
There are several key considerations to keep in mind when borrowing money for your business:
1.) The Purpose Of The Loan
It’s important to have a clear idea of what you need the loan for and how it will benefit your business. This will help you determine the type of loan that is best suited for your needs.
2.) The Terms Of The Loan
Make sure to carefully review the terms of the loan, including the interest rate, repayment period, and any fees or penalties. Be sure to understand all the terms and conditions before signing any agreements.
3.) The Lender
Consider the reputation and experience of the lender you are working with. Research the lender’s track record and read reviews from other borrowers to get a sense of their customer service and the terms they offer.
4.) The Collateral
Some loans may require collateral, such as assets you own or property you hold. Be prepared to offer collateral if necessary, and be aware that if you default on the loan, the lender may seize the collateral.
5.) The Impact On Your Business
Think about how the loan will impact your business in the short term and the long term. Will the loan help your business grow and be successful, or will it put too much strain on your finances and make it difficult to repay?