Do you think today’s Budget will help small businesses?
The Chancellor offered little in the way of support for small businesses. The key small business announcement was in fact made on Tuesday with the government backed ‘credit easing’ National Loan Guarantee Scheme. However, only four banks have signed up to participate in offering low interest rate loans to small business. Do you think this is enough? Whilst the Banks are again urged to offer loans to small business, we frequently hear from business owners that Banks are not willing to lend.
There are several ways in which a small business can raise funds:
The more traditional method is to take out a loan with a Bank. On that loan, you pay interest. This is something that the Banks have been reluctant to offer in recent years. One potential way of successfully taking out a loan is to obtain a guaranteed loan, secured against an asset you own. However, with the current decline in house prices, this can prove difficult for many small business owners as the security may no longer be available with your property.
An alternative method, that is becoming increasingly common, is to offer the Bank a personal guarantee against the loan. This provides the Bank with that comfort that you have personally guaranteed to repay the loan. If you are unable to provide a personal guarantee yourself, the bank may accept a personal guarantee from a family member.
Another possibility is to take out an agreed overdraft with your Bank. This method can be more cost effective than taking out a loan from a Bank, provided you stay within your agreed overdraft.
The final way of raising finance through borrowing is by lending money from family or friends. This is often the least expensive option, as the interest rate is likely to be less than what a Bank would offer. However, be sure to pay the loan back in the agreed timescale, at the agreed interest rate, or you may find yourself in disputes with family members or close friends.
The methods outlined above are all forms of lending which create debt in the company. Therefore, before taking such a step, you should speak to an independent financial expert for further advice and information
There are of course other ways of raising funds for your small business that don’t create debt in the company. For example, if you obtain an investment from a venture capitalist, your ownership would be diluted, but you would have a debt. Whilst you would have to share your profits with the investor, there may not be a requirement to repay the investment.
If you decided to set up a limited company, you may be able to get investments from family or friends and in return, offer them shares in the company.. This would again dilute your shareholding, but would not create debt in the company.
Whilst certain criteria would need to be met, subject to you being eligible, you may be able to receive a government grant or sponsorship. This form of funding is not repayable and is something you should consider.
Finally, if your cash flow is tight, there are other ways of obtaining finance such as invoice finance. This can take the form of invoice discounting or factoring and both can be beneficial to a business experiencing short term cash flow problems.
As you read this blog, you will no doubt be hearing different views on whether the Banks are lending money to small businesses. Whichever view is correct; there are a number of alternatives which you should consider if you require finance for a business.
If you wish to discuss your financing options in more detail, please do not hesitate to contact Hodgsons for further advice.