Financing Options

Banks will usually not give unsecured loans for start-up capital because many businesses tend to fold up within the first two years of operations. In general, banks are highly conservative lenders compared to other types of loan companies so this is to be expected. However not everyone interested in starting a business has the option for putting up their property as collateral to secure a loan. Fortunately, banks offer alternatives to using your home to secure a business loan – for example, you can opt to name a “guarantor” who will be under obligation to settle your debt in case for some reason you are rendered unable to do so. Or you may be allowed to give a “debenture” instead which is a stake of your company and its assets that the bank receives in exchange for lending you capital. This option is available if you are putting up a limited company (which allows it to have divided ownership). In case these alternatives are not ideal for you (if, for example, you prefer to not to share ownership of the business with the bank), you can still consider other forms of financing:

Business Angels
Business Angels refers to strongly motivated individuals that invest in a business venture not only their money, but also their own management skills and expertise. As with banks, Business Angels also require a stake in your business in exchange for their investment, but the knowledge and experience they provide can prove to be a valuable resource for your company’s long-term growth and profitability.

Chattel Mortgage
Chattel mortgages are a type of secured loan that uses your business’s assets (i.e. computer hardware, office equipment, production machinery, company vehicles) as collateral. This option is currently open only to businesses incorporated within England and Wales.

Commercial Mortgage
A commercial mortgage is a form of secured loan which provides capital for buying business premises which are then put up as collateral for the loan. This type of loan is also your option if you need to remortgage your current premises. Commercial mortgages are possible for any type of property, including retail and industrial facilities.

Terms and conditions of a commercial mortgage will depend on the lender providing the loan. Typically, the period of repayment ranges from fifteen to twenty years. Longer periods will require a bigger deposit of up to 30%, particularly if your business was just recently started. A non-recourse mortgage option may be available that allows you to create a separate company to be accountable for the loan, thereby you can avoid putting your company’s assets other than the business premises at risk.

Always consult your accountant and solicitor before going into a commercial mortgage and go over the particulars of the loan agreement with them to ensure that your company’s best interests are protected.

Equipment Finance
As your business grows, it will require additional capital investment to maximise its profitability. In the case of a restaurant, for example, you may need to upgrade your kitchen’s equipment to accommodate the greater demand from the increasing number of customers who dine there regularly.

Covering this expense usually requires a large loan. But since equipment is considered a valuable asset, banks tend to offer competitive interest rates for equipment finance. The collateral will be the equipment your company purchases with the loan, thus the lender has the right to repossess this equipment should you be unable to repay the loan.

Equipment finance is also possible through leasing. This option allows you to rent equipment on flexible terms that are set-up specifically for the needs of your business. You pay for the rental of the equipment every month, which may be a more manageable arrangement for your company than purchasing the same equipment outright with a large outlay of cash from your pool of capital.

Factoring
Late invoices resulting from debtors not paying on time can limit a company’s cash flow. This can spell disaster for small or new businesses that rely on a steady flow of revenue for regular and unforeseen expenses that it may not have enough extra capital set aside for. Factoring can stabilise your cash flow by allowing your business to avail of line of credit based on your accounts receivable, usually up to 85% of the total amount. There is a charge of up to 3% of your company’s annual turnover in exchange for this service.

Overdrafts
A bank overdraft allows your company to access a certain amount above the actual balance of your business bank account. The overdraft amount is charged a rate of interest linked to the Bank of England Base Rate. The interest only applies to the amount of overdraft actually used (i.e. the account’s outstanding balance) but there are also monthly fees, as well as larger interest rates that apply to unauthorised overdrafts above the agreed limit. Overdrafts are regularly used in the UK by most businesses, not just start-up companies.

However, overdrafts should be considered a short term solution if your company is not yet established, as banks will normally not give overdrafts to new companies should the economic climate become less than ideal.

Research and Development Grants
Financial bodies such as the European Investment Bank and European Investment Fund award special EU research and development loans to help growing businesses afford new equipment and expand their operations overseas.

The UK Government also provides a variety of research and development grants based on tiers of entitlement that take into account several factors regarding your business project. For information about qualifying for a government grant in the UK, and a description of the grants available, visit your local Department of Trade and Industry office.

Venture Capital
Venture capital is a direct long term investment by an individual or investment group. To help your business expand, acquiring venture capital can be a suitable alternative to taking out a loan or selling equity in your company. In exchange for a part of your business, the venture capitalist will provide additional funds to help your company maximize its growth potential.