Borrowing money to fund a new business?

Getting a new business off the ground is an exciting time for any would-be entrepreneur. It is also a time for much thought and some careful planning before the new business starts operating. Apart from the initial idea, which is the reason to start a business in the first place, it’s essential to get the financial aspects of the early days put in place.

Even good, thorough financial planning can come unstuck if circumstances in the particular marketplace change, but it should not deter entrepreneurs from developing as robust a financial plan as possible. Preparing a business plan that includes finance, marketing, human resources and management plans will demonstrate a professional approach and help unlock doors for any investment required.

Consider where to borrow

Once the financial plan has been completed it will be clear if there is a potential shortfall, or if money needs to be raised to fund equipment or premises. There are plenty of organisations willing to lend, and these will be considered, but there may be other avenues to explore first.

A business owner may have cash or saleable investments available to put into the start-up, thus avoiding interest charges on loans. Family and friends may be willing to help, though it’s important that they only invest an amount they can afford to lose. It may be possible to take out a mortgage on a personal property; the money can then be lent to the business with the advantage that mortgage interest rates are lower than rates for business lending.

Business borrowing options

The first port of call is usually the bank, and if it considers the financial plan to be sound it may well offer a loan. As with any form of finance, it’s essential to read and understand the small print before borrowing money. Fees and interest rates should be checked carefully, how long the loan will last for and any penalties for late payments or defaults. This should be done with any form of loan arrangement no matter who the lender is. Most lenders in the traditional financial sector are likely to ask for security so a loan may need to be secured on a personal property.

Leasing equipment that it is not necessary to own is an option, thus removing the need for an initial large outlay of capital. Hire purchase is an alternative to leasing, so payments are made over a fixed period of time and the equipment is owned by the business at the end of that period. There can be tax advantages with both methods so it’s worth having a good financial adviser/accountant to help with this.

Further options

There are many lenders who may be able to help quickly if there is an unexpected shortfall in the finances of the business. One option to consider would be log book loans where a car’s vehicle registration certificate, or logbook, can be signed over to the lender to release funds. This gives the lender an asset to sell in case the borrower defaults. It is a good way to source some money quickly, however, interest rates are considerably higher than when using more traditional lending routes.