5 tips to finding the right loan for your start up business
Launching a new business is as exciting as it is daunting. You need to set up good foundations to prime your startup for success.
With around 29% of new businesses failing because of a cash crisis, getting your finances right is as important as your smart business plan.
Here are the best ways to find a business loan for your next entrepreneurial venture.
- Consider your options: bank loan or alternative lender?
One of the most common questions budding innovators ask is: “which type of business loan do I take out?”
There isn’t a one-size-fits-all answer to this question, since each new business has different financial needs. Some lenders may be unwilling to approve business loans with a low value, so if you only need a few thousand pounds, you could consider a microloan.
Another key question you’ll need to ask is: secured or unsecured? If your business has assets, use them as collateral. This can give you access to some of the best rates from traditional bank loans, and will be necessary if you need to borrow more than £25,000.
If you don’t have assets, you may need to consider alternative options, such as unsecured loans. You might also offer future revenue or a percentage of the company in exchange for the loan.
Compare the range of loans from Know Your Money to weigh up the types of business loans available to you and find the best rates.
- Be transparent about your financial position
Lenders want to know about your finances before they agree to part with any cash. When looking for a startup loan, you’re likely to meet with extra caution. Since so many new businesses fail, you need to convince lenders your business will survive and thrive.
At the same time, don’t exaggerate the size of your business or be economical with the truth. Do your research, create a great pitch and present credible figures.
- Tidy your personal credit
Sometimes, your personal credit rating can be a factor in securing business loans. This is more likely to be true at the very beginning of your entrepreneurial life, so tidy your personal credit history and showcase your ability to borrow responsibly.
If you have poor or no credit history, taking out a low-interest credit card, making reliable repayments on this each month can be a simple way to boost your score – alongside simple tricks like registering to vote.
Take a look at these tips from the Money Advice Service to ensure your personal credit habits are tight enough for an excellent rating.
- Work with your niche
You may think lenders don’t care about your ambition or plans, or that you’re just another number. With business loans, this is rarely true – lenders want to know how you’ll use the money, and they want to hear about your business plans, so they can assess the level of risk you pose.
With this in mind, work to your strengths, and highlight your niche. Don’t try to hide the great ideas that make your business unique.
Venture capitalists and angel investors typically work with startups in an industry they have knowledge of, so don’t waste time pitching to a tech startup investor if say, your plans are in manufacturing.
- Request the right amount for your business plan
This is perhaps the most important step for your long-term business success. To create a rough business plan, ask yourself where you’d like to be in five or ten years; if you’d like to scale or grow again in the future.
It is important to avoid underestimating costs – consider everything you’ll need, including the cost of renovating premises or essential transportation. You don’t want your funds to dry up before your goals are realised.
Pay attention to fees, APR and other costs. It may be tempting to go with the first lender willing to invest, but you need to consider the long-term implications. A loan that could accrue significant fees may impact your business negatively in the long run.
Sometimes it pays to accept a slightly smaller loan, if the rates are competitive and the lender has positive reviews. This way, you’ll lay the foundations for a business that can thrive for years to come.