smallbusiness.co.uk: Helping your business think big

If your business plan and financial forecasts are sound, you may be feeling brave enough to approach a bank for funding.

The advantage of going to your bank is that if you’re a creditworthy customer, your account manager should look favourably at your application.

Nevertheless, you might want to think twice before taking the banking route straight away. Firstly, the presentation of your business plan will improve the more you do it. If your bank is really the best possibility, you don’t want to rush in, mess up the presentation and blow the possibility of funding. It could pay to go to another bank first to rehearse your pitch.

The bottom line is that you have to shop around. Don’t be put off by being turned down; try another bank or another branch that you think may be more used to business deals. Following a government review of business banking, banks must now make it much easier for you to carry your credit history from one bank to another, making it simpler for you to prove your creditworthiness.

Banks must also “unbundle” their products, so you can get a loan from a bank without being forced to move your current account to that bank. When shopping around, remember to ask what rate you will be charged and compare this with other banks.

Forms of finance

Banks offer money in two ways:

1) Loans

2) Overdrafts

Loans can be very flexible and the exact terms vary from bank to bank. You can borrow money for periods of between two and 30 years. The rate of interest can be fixed, variable – a number of percentage points over the bank base rate – or in some cases at a monthly managed rate. Sometimes for larger loans (for example, £15,000 plus) you can negotiate a repayment holiday from repaying the capital you borrow. So for, say, one or two year you pay interest only. You may also be able to arrange “stepped” repayments.

The amount you can borrow can vary from £1,000 to £1 million. The type of loan you can get depends on the viability of your plan.

When the bank says ‘no’

If the bank doesn’t work, there are options, such as the Small Firms Loan Guarantee Scheme. This is designed to assist relatively new ventures that are unable to borrow in the normal way because they cannot offer adequate security for a loan. The scheme is currently open to businesses up to five years old and with an annual turnover of up to £5.6 million if it is a manufacturing business.
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You must be able to show that you have tried to get a conventional loan but failed because of lack of security. The Department for Business, Enterprise and Regulatory Reform (BERR) then steps in to provide security by guaranteeing 75 per cent of the loan. In return, you pay a premium to the BERR of two per cent a year of the outstanding loan.

Under the scheme, you can borrow amounts up to £250,000 and the loan can last up to ten years. To apply, you need to go to one of the participating lenders, which include many of the major banks. You can get a list of participants from Business Link. The lender will assess your application in the normal way, taking into account your business plan, what money you are personally investing, other debts you may have, and so on.
Check the terms of the loan and try to negotiate on any arrangement fee. You may be required to take out life insurance to cover the loan.

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