Every company owner needs to understand how to fund a business, from the different lending options available to the process of what’s required to secure funds.
Small businesses have more lending options available to them than ever before. No longer do they have to pin their hopes on a bank loaning them the funds they need to grow their company; a raft of new alternative finance options entered the market in the wake of the financial crisis of 2008, which hit small business borrowers looking for bank loans hard.
But in some ways, the proliferation of lenders has made the process of how to finance a business more complicated. With so many sources of finance at your disposal, it’s now more important than ever to have a clear picture of what the reality of financing a business looks like and how it might differ from your expectations.
To help you get a grasp on what to expect as you go through the process of borrowing money, we’ve lined up some of business owners’ expectations of what it will entail with the true reality:
Securing a bank loan
Getting a business loan from a bank is going be to near-impossible because they are still reluctant to lend to small firms.
There’s a reason that over half of smaller businesses still approach their main bank first when they require funding. Sure, they’re seen as the ‘less risky’ option, but also because approval rates have improved in more recent times.
The latest figures, released by UK Finance, for Q3 2018 reveal that banks approved nearly 70,000 loans to SMEs in the final three months of last year and success rates “remain consistently high”, with eight out of 10 applications for finance being given the green light.
While it’s still far from plain sailing that you’ll get approval – the lending criteria of banks also tends to be stricter than that of newer ‘alternative’ lenders, meaning it’ll be difficult to secure funding if your credit history is anything but spotless and you’ve been trading for less than two years – it’s not completely out of reach.
The business finance approval process
The process of getting a lender’s approval for funding is likely to be long and drawn-out, and you’ll be required to jump through hoops, gathering documents to support your application.
The explosion in the number of lenders other than banks has greased-up the approval process, with many providers now incorporating technology in order to make it easier and quicker for small business applicants.
Lenders understand that small businesses often can’t afford to wait for months to secure the funds they need. So, if you’re organised and able to retrieve documents that lenders will undoubtedly want to see, such as bank statements, then you could have the money in your business account before you know it.
Banks, however, remain the exception. Applying for a bank loan can be a lengthy process, and you might be asked to prepare a comprehensive business plan as part of the application.
By signing a personal guarantee to secure the funding for your business, the lender will only asset-strip from the company in the case of a default.
A survey of 510 small business decision makers, published by small business loan provider Wirefund, revealed that more than half didn't know what a personal guarantee was, while a fifth thought that it meant a business owner would have to pay the money back on time ‘to the best of their ability’.
The reality is that if a loan is agreed with the condition of a personal guarantee, a failure to meet repayments leaves you – the person, rather than “it”, the business – liable.
Default on the loan and the lender can take possession of your home, car and whatever’s in your bank account. If you can call it an asset, it can be stripped. Credit scores can also be hit, making it difficult for you to rebuild your finances in the future.
However, there are steps that you can take to moderate your risk having signed a personal guarantee. For example, if you’re required to sign a personal guarantee to be able to borrow additional funds from a lender, you might want to consider personal guarantee insurance.
Purbeck offers Personal Guarantee Insurance for SME Directors who have business loans or financial agreements. We cover up to 80% of your risk, giving you peace of mind as you plan the future growth of your business. Please contact one of our specialists today to learn more on 0208 004 7252.