Getting finance to start a small business is not easy, but it is possible.
The problems you will face is several-fold, but most importantly you don’t have a track record and assuming this is your first small business, you personally don’t have a track record of running a business. On top of that the business you are creating is new and therefore also has no record from which the bank can look at to base it’s review on.
You might begin by getting a small business loan from a bank and bank lending is all about confidence in the owner, financing of the new business and what assets are available for security and what the business is going to do together with the market in which it is going to trade. So the job of the business owner is to give as much confidence is all these areas as possible – let’s take each one of these points:
- Confidence in you as an owner of this new business can be built by your knowledge of the business you are entering. For example, if you already work in the industry you are proposing to enter and have done for a number of years, then this will provide a great deal of confidence to your new bank manager. However, if you are going of piste and starting a business you know very little about, you are starting with a bit of a brick wall.
- A bank will only lend a part of the overall capital that is required, they will never lend 100% of the funds required. The level of funding will partly depend on the industry in which the new business is going to operate and of course it may well be influenced by the fact that it is a start-up. If the lending is to purchase assets for the new business, these can be offered up for security and therefore will help with the lending. However, if the lending is for working capital, then the bank will be looking elsewhere for security and always for a personal guarantee. Security will usually be in the form of a debenture against property – your home for example, assuming you own it, but failing this, you might find it difficult to borrow, unless you can use the Enterprise Finance Guarantee (EFG), which is there to guarantee up to 70% of a bank loan in the absence of alternative security.
- Bank lending is influenced by the market in which the business will operate, as each industry carries different risks. One way to reduce this risk and to make it easier to get bank lending is to buy into a franchise, as banks love franchises, as they are a ‘known quantity’.
There are other sources of funding to start a small business, which includes the use of credit cards, believe it or not. Depending upon how much start up finance you are looking for, will depend on the sources you can use. However, credit cards can come in very handy at the outset, as you can get these zero percent balance transfers (with a transfer fee of course) but the cost of this credit is cheap. You can use the credit card to purchase various items needed in the business, so can be a good source of credit.
However, the most recent way to fund projects and a funding stream that is growing to huge levels is ‘Crowd Funding’, which is the practice of funding a project or venture by raising monetary contributions from a large number of people, defined by Wikipedia.
If you want to know how to get a loan to start a small business with bad credit, then you might be in difficulty. Banks will not normally lend to anyone with bad credit, as they will always do a credit search on you. However, it will depend on the reason for the bad credit and how old the credit history is – this could affect your crowd funding application also, which could leave you needing to get funding for other sources, like family and friends.
To work out your loan requirements you will need to prepare a plan together with cash flow forecasts – these plans and reports will be needed for you bank if this is your chosen lending route, as they will show the working capital requirements of the business.