Applying for loans as a small business
If you've recently founded a company you'll often find yourself needing extra cash.
Start-up finance can be hard to come by. If you’ve recently founded a company, you’ll often find yourself needing extra cash, whether it’s for further investment or just to stay afloat on a lean month.
Business loans are the most common form of funding for an early start-up, but choosing the right loan is just as important as getting the money to see your idea through. But with a huge variety of providers and products to choose from, it can be hard to decide which loan best suits your business.
Have the right mindset
Before you start searching, you should be clear on why you need the loan, and what it will be used to finance. If it’s just to cover cashflow problems, remember that it’s always better to cut unnecessary costs rather than get into debt – which will increase your costs overall.
Decide how long you will need the loan for
If you’re covering a cash shortfall, you should work out the date you’ll be able to repay your loan by.
Figuring out when you expect your cash flow to improve will help you decide how long a repayment period would be best for you. In this case, you’ll probably want a short-term loan, which tends to be higher-interest, but costs you less overall, as the interest has less time to accrue.
If you’re borrowing to invest, you should have a timeline in mind for when that investment will pay itself back. Here you may be thinking of a medium to long-term loan of up to five years.
Fixed or variable?
Interest rates are at a historic low, so if you’re looking at a short-term loan, variable-interest loans are an attractive option – provided you’re sure you’ll be able to pay them back on time.
But the Bank of England is keen to raise interest rates back up. Last November saw the first interest rate rise since 2007, and another rise this year is likely. So if you’re taking out a variable rate loan for the longer-term, be aware that a gradual increase in interest rates is likely over the next few years.
A fixed rate interest loan will shield you from further rate rises, but will generally be more expensive than a variable rate loan, at least initially.
Consider non-traditional providers
Loans from banks to businesses are dipping, but there’s been a surge in lending from alternative providers. Equity investment (investment in shares) and peer-to-peer lending both rocketed in 2017, as improving post-recession confidence outpaced the banks’ willingness to lend.
And an increasing number of challenger banks and alternative lenders have also stepped in, offering discounted rates to lure companies away from better-known names.
While it may be tempting to go with a brand you know, make sure you’re checking to see what kind of rates you can get elsewhere.
Price comparison sites
As with insurance, mortgages, energy, credit cards, holidays and just about every other major purchase, you can compare providers on price comparison sites.
And whatever you choose, make sure you are certain you’ll be able to keep up with your repayment schedule. Late repayments will affect your ability to procure loans in future, as lenders will be checking your credit history when deciding whether to lend, and what rate they’ll charge you.