How a small company can get a business loan: Three options

Here, we look at three routes to debt finance for your small company.

In the early stages of business it is more than likely that you will need some funds beyond what you can supply yourself and through family and friends.

This can be achieved through equity options such as crowdfunders and private investors, but some business owners prefer to go for the debt route.

Three reasons to take a business loan

  • The ownership interest in the company is not diluted by giving away further equity
  • Principal and interest obligations are known amounts which can be forecasted and planned for
  • The company is not required to manage large numbers of investors, hold meetings of shareholders, and seek the vote of shareholders before taking certain actions.

In today’s business finance landscape, there are a variety of options for a business loan, from online debt-based options to private investors.

Here, we look at three of the options available and how to go about getting them.

Business Enterprise Fund

The Business Enterprise Fund provides regional loans from £500 to £150,000 to businesses that are unable to raise the finance they require from mainstream lenders. Lending up to 100 per cent of the proposition across all sectors, BEF has assisted more than 2,000 businesses since making its first loan in 2004.

Funding can be for all business needs including cash flow, assets and expansion plus those applicants with poor credit are also considered.

In addition to its Bradford base, BEF operates from local offices in both York and Leeds and has also expanded into the North East with an office in Darlington.

The Business Enterprise Fund is a social enterprise and a Community Development Finance Institution; all profits are reinvested in the company to further its social aims.

Getting funding through Start Up Loans

Chique Photography began in October 2014 and offers photoshoot and makeover experiences. Co-founder Jane Earnshaw got in touch with the Business Enterprise Fund to help begin her business venture with a Start Up Loan.

The Start Up Loans service is part of a government initiative to encourage emerging businesses hit the ground running.

The finance on offer is available up to £25,000 at 6 per cent with terms up to five years. BEF is an official delivery partner for the scheme.

Earnshaw says she had great support throughout the application process after an internet search for finance options uncovered the scheme.

‘We found BEF online and (the BEF start-up expert) was absolutely brilliant and gave us the help and advice we needed,’ she says.

Bank loans

A study by C2FO finds that more than a third of UK small and medium-sized enterprises state that it’s too expensive to borrow from a bank, if they are even approved in the first place, with a majority financing themselves with cash flow from operations.

According to those businesses surveyed, only 30 per cent of SMEs in the UK are able to borrow for an APR of under 6 per cent (versus 50 per cent in the US). Those in the financial services and insurance industry are borrowing at the highest rate, at an average of 7.2 per cent.

The survey also shows that those companies finding it cheaper and easier to borrow tend to pay their suppliers more promptly.

A bank loan for equipment

However, it can be easier for businesses that are more established to get the funding they require. James Blackman, managing partner of Cocoonfxmedia, which has been running for eight years, took out a bank loan of £10,000 for IT equipment with HSBC, with which he was banking at the time.

‘I was very surprised how helpful and quick the process was considering the bad press banks were getting for lending,’ he says.

‘However we’ve never been late on any payment to any supplier so our credit rating is very strong.

‘Build a good credit rating by paying suppliers on time and only borrow what you absolutely need,’ he adds.

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Online debt

Online loan options are increasingly popular for small businesses. A report by the British Business Bank earlier in 2018 said bank lending to small business was flat, while peer-to-peer lending rose 51 per cent year on year.

Indeed, internet-based solutions have given rise to a raft of new lenders that can fund companies quicker than banks, and can often be more flexible with their lending criteria.

Today’s online business debt operators include Liberis, Fleximize, and ezbob, but the market is expanding. A slightly different offering is provided by MarketInvoice, which offers online invoice finance.

Then there are the peer-to-peer lenders which, instead of lending money off their own balance sheets, match individual investors with numerous businesses that are looking to borrow. These include Funding Circle and ThinCats.

The increase in lending reflects a growing awareness and appreciation amongst SMEs of the alternative funding options available to them.

Benefits of online debt 

  • Many providers will offer top-ups and repayment holidays as a standard feature of their loans, rather than an expensive add-on.
  • Often, the money will be lent off a lender’s own balance sheet, allowing them to set their own lending policy, meaning they’ll often fund a company that a bank, for example, couldn’t.
  • Businesses can sometimes enjoy lower interest rates when borrowing through a P2P platform, but it can take longer to receive the funds and there’s usually a fee to pay.

Related Topics

Small Business Loans

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