The most common obstacles we find start ups face is access to funding. Securing appropriate finance enables start ups to transform their innovations/ideas into a thriving business.
Are you a start up looking for funding? Here’s a guide to help you navigate the different finance options available:
What are start up business loans?
Business loans for start ups are designed to provide new enterprises the funding they require for the initial set up and early stage growth of the business. Like any other business loan, a lender provides a lump sum of capital that your business pays back with regular payments at a fixed interest rate.
Lenders typically will want to see the following details:
- Your business plan
- Your turnover
- Your trading history (if you have any)
- Key information on your founders
- Your projected earnings
- Details of any other related businesses you’re involved with and how they relate to the wider “group structure”
These details provide an overview of your business and the rationale behind applying for a start up business loan.
Types of start up business loans available:
Secured loans:
Secured business loans require security in the form of collateral. The lender bases how creditworthy your business is on the specific business case, reason for requiring funding, your financial statements, and the value of the collateral you secure the loan against. Most often, assets such as your business premises or your house are used as collateral for security.
Unsecured loans:
An unsecured business loan is a financial product where a bank or lender provides funding for your business, without requiring collateral in the form of an asset. The lender will instead assess your credit history, financial statements and card payments in order to determine how creditworthy your business is. For this reason, unsecured loans are popular with business owners with minimal assets.
Merchant Cash Advance:
A merchant cash advance is a short term loan for businesses that frequently accept card payments. The lender receives an agreed percentage of your business’s daily card sales until the advance is repaid. Merchant Cash Advances could be a suitable option for your start up if you regularly accept card payments – typical of retail businesses for example.
Your business may also be eligible for a Government start up loan or a traditional bank loan. You may find that you do not meet the eligibility criteria of these loans, that’s where Mill Wood can help.
Advantages of start up loans:
Access to funding: Start up loans provide you with the funding required to launch your business.
Retain ownership: Securing a loan means you retain full ownership of your business, as opposed to having an investor that would want to own a slice of the pie.
Allows you to build your business credit: A start up loan begins your business’s journey to building a strong credit profile, helping you access additional funding in the future.
Flexible use of funds: There are various financial loan options for start ups. From purchasing a new business vehicle on asset finance, to a loan for a restaurant re-fit, talk to Mill Wood to discover your start up loan options.
Start up loans can provide the springboard your business needs to launch into a successful venture. They are often considered more favourable than finding investors, as typically investors will wish for equity in your company – meaning you own a smaller portion of your business. Business loans for start ups are not without their risks, so it is crucial you understand the potential pitfalls to you and your business when you apply for this type of finance.
Potential drawbacks of start up loans to consider:
Strict application criteria: You must meet the lender’s eligibility criteria, which can be fairly rigid for start up businesses.
Risk to your credit rating if you default: If you don’t meet your repayments on time, this could damage your credit score, making it difficult to borrow money in the future.
Have a look at the frequently asked questions surrounding business loans below:
FAQs:
Do start up loans require a personal guarantee?
Our panel of lenders may ask for a personal guarantee, however all finance applications are considered on a case-by-case basis, so we cannot say for sure whether it is a requirement for your specific application until we have more information. Lenders also consider other collateral as security, not just personal guarantees.
Can a start up loan affect taxes?
Like all business loans, start up loans are not considered taxable income. However, interest rates on business loans are tax deductible, meaning it is possible to claim the interest as an expense which could lower your tax bill.
Can I get a start up loan with bad credit?
Much like our answer to most finance enquiries – it’s possible. When you begin your application for a start up loan, the lender providing the finance will carry out a personal credit check to ascertain how creditworthy you are and if you can manage the repayments. If you have poor credit, you will likely struggle to get accepted for a start up loan.
Some lenders are more commercially minded, as opposed to being solely credit focused. These lenders may consider your business case, a well-written business plan and a demonstration of how you can repay the loan to be more important than simply your credit history. Be aware that with a less than favourable credit history, interest rates will likely be higher.
To speak with a broker with the experience and commercial understanding to help you navigate your business finances, book a discovery call with Mill Wood.
