Starting a Business with a Loan
External capital for your new business will allow you to meet the initial costs of setting up your firm as you face a period of little or no income. Depending on the size of your new business, some methods of finance may be preferable to others, while some may not be available to you at all. You must assess the needs of your company, its initial financial requirements, and its ability to meet the demands set out by creditors.
Seed money may be obtained from high street banks, private lenders or even family and personal savings. However, if you are looking for an external source of finance in the form of a loan, there are several important considerations to bear in mind before you begin applying for financial support.
Start-up capital is typically used to cover initial costs including market research, production assets, salaries and stock. At the beginning of your company’s operational life-cycle the outgoings will be sizeable and income will be negligible or non-existent. This “valley of death” period, where your company is spending more than its total earnings, will vary in duration depending on the nature of your business. This will also affect the types of loans that are suitable.
A typical loan from a high street bank has traditionally been the main source of start-up capital for small and medium firms; accounting for almost 70 per cent of businesses’ primary finance according to the Bank of England. The current economic climate has altered the picture somewhat in recent years, making the market more competitive in both supply and demand. Rates and repayments are favourable, with many banks now offering loans with fixed payments and interest rates calculated at current levels. This can be beneficial with interest rates currently standing at their lowest level in years. However, there is an increased demand too, and many applicants are finding these loans difficult to obtain.
In more and more cases, start-up businesses are sourcing their seed capital from secured loans companies. When approaching a secured loan company, take the time to consider the risks that these businesses are taking on when they lend to you. Present yourself as responsible and diligent. They will want to assess your business model even more rigorously than perhaps a large high street bank would. When applying to any external party with the hope of acquiring start-up capital, you should take steps to re-assure them that you can repay your loans promptly and reliably, and that you have been thorough with your proposals. Although you approach them as a service, remember that they too are just another business, and will not take undue risks if the returns do not appear to offer sufficient incentive.
So what can you do to reassure potential creditors? A robust business strategy is a must. Project your income and expenditure beyond the time-scale of the initial loan. Demonstrate that you have assessed every part of your business and allowed comfortable breathing space for the dreaded “worst case scenario”. Finally, have your market research prepared. Prove to potential investors that you have identified your customer base and they will be confident that you can find a niche in the market, allowing you to survive and flourish as a business.
Ensure you carefully research any loans company to guarantee they are a legitimate source of finance. Find out about the variability of interest rates on your loan and penalty payments before you proceed. The financial loans market is expanding at a tremendous rate and, if you investigate the many alternatives, you should be able to find an attractive and secure source of start-up capital.