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Business Borrowing: What are the options?

Business borrowing

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Is business borrowing as difficult as it sounds? You have been dreaming up your new business venture, have a business plan that Alan Sugar would be proud of and are ready to embark on your self employed journey of a lifetime. There is just one thing standing in your way- money. Money to set your business up or the money needed to further develop your fledgling company into a fully grown money making machine. The growing number of redundancies and lack of jobs available since the economic downturn, has given way to an increasing amount of would be entrepreneurs, ready to do what it takes to be their own boss. However, unless you have a huge stash of cash under the mattress, most businesses will need to borrow money at some stage and there are several different options available.

What is the simplest form of business borrowing?

Probably the most simple form of business borrowing is known as ‘debt borrowing’ and like you would take out a personal loan or overdraft, your business would do the same. If you only have short term financial requirement, for example to buy extra stock for a large order before payment is received, you may think about only having an overdraft facility, where you can draw out any extra money within your over draft.

There is no set time limit to repay the money but you do pay interest on the amount borrowed and in theory, the bank could ask for the overdraft to be repaid in full at any time. As long as there has been no serious changes to your credit status or you’ve breeched any contracts with the bank, this is unlikely to happen, but your over draft will be review every 6-12 months. Overdrafts are relatively simple to arrange providing you have all the correct paperwork, are more cost effective than borrowing on credit cards and provide greater flexibility than a loan. They can offer security for unexpected events and help with short term cash flow issues.

Business loan

If you require a larger amount of money or need a more long term borrowing solution, you might look to arrange a business loan. Straight forward to arrange, you will need to provide your lenders with the relevant documents and decisions are make between 2 and 10 working days, depending on the amount and your circumstances. Arrangements will be made with your lender regarding the repayment terms and conditions and the set interest rates can prove more cost effective than staying in your overdraft for a long period of time.

Company Credit Cards

Most companies have a business credit card on hand to pay for every day expenditure. Credit cards are a great form of instant payment for smaller items such as fuel for a company van and they can help with cash flow in the short term. But high interest rates can make it an expensive option, so opt for a low interest card or pay off the balance in full to avoid interest charges completely.

starting your own business borrowing

Equity Financing

The other common form of business borrowing is equity financing. The majority of new businesses are funded by equity with friends and family giving money for a stake in the business. For those without that luxury, equity lending involves convincing lenders to give you money in return for a share in the business – ‘Dragon’s Den’ ringing any bells?! The big advantage with this is that there is no requirement to set up repayments or worry about interest on a loan adding up; and if the business fails, there is no need to repay the money. However, it’s convincing your audience to invest that is the hard part.

Business Plan

You need to prove your businesses profitability or have a business plan that is thorough enough to predict a large return in order to tempt investors, after all, they are parting with their money with no guarantee of a return and maybe lose their investment altogether. The percentage of your business that you are prepared to relinquish, the rate at which your business will grow and the amount of money you need in return, will be essential elements when attracting interested parties. Investors will normally want to see at least a 20% growth each year, any less and they may face very little or no return at all on their investment.

You do have options

Although equity investment is the safest form of raising capital, many business owners are reluctant to release ‘control’ of part of their business, even for very small stakes. Whether you decide to take out a loan, use your overdraft or sell parts of your business for equity, look into all available options and ensure you are getting the best deal for you and your company. After that, focus on making it a roaring success and you may just become the next Richard Branson!



About Rebecca Robinson

About Rebecca Robinson

After spending the last 8 years juggling life as a mum of two, wife and working full time as a Project Manager for a global telecommunications company, Rebecca Robinson made the decision to follow her love of writing and took the plunge; turning her passion into a full time career. Since becoming a full time writer, Rebecca has worked with various media and copy-writing companies and with the ability to make any topic relevant and interesting to the reader, now contributes to The Working Parent on articles ranging from credit cards to teenage relationships. Ever the optimist, Rebecca's dreams for the future include a house in the country filled with children, dogs and horses in the field!

Website: Rebecca Robinson

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