Where to look for Commercial and Business Loans

Small business loans information

The Government is encouraging small businesses to set up. From these small businesses they hope that larger businesses will grow, often in new and developing areas of the economy. Add to this the sometimes uncertain employment economy where being self employed may be the best choice. There are also those who simply want to run their own business or develop their own business ideas.

This movement has lead to an increasing number of people becoming self employed and setting up their own business either on their own or with friends and partners.

Some lenders still consider that those in employment are a lower risk than those who are self employed or run there own business. This is not always the case and it is therefore in your interest to check out the lenders who specialise or offer specific terms for the self employed and those with a small business.

Ideally lenders will be looking for a set of accounts, if possible covering the last three years trading and a business plan projecting income and profit for the business over the next year to eighteen months. This is not a legal requirement for all businesses and you may not have these items available. That need not present a large problem. The lender will want to see something to substantiate past income. That might be a letter from your accountant or a set of previous tax returns. Future income may just be a record of orders for future work or a list of your current sales record with a forecast going forward.

The need for information will vary from lender to lender, and also on the size and length and type of small business loan you require.

You need to consider what you want the small business loan for. How much will you require. How long a term and what conditions in the small business loan agreement will be important to you. And if the lender wants the small business loan secured on your own house or by personal directors guarantee, would you be willing to do that.

If the small business loan is going to be used to finance a new customer contract then that will give the lender a known income to finance the loan. It may however be that parts of your business are developing, or your general turnover is increasing with associated costs to finance, or you have been offered a new business opportunity that you want to develop. All these items will have a projected income which can be reviewed to see if it will finance the small business loan.

It may however be that you are using machinery, transport or equipment, such as computers that need to be replaced or upgraded. In this case the small business loan will need to be financed out of existing income levels.

It may be that when you started business you took out several forms of finance and now want to pay these off and bring your debt into one controllable agreement. In this case you will want to make certain that the new small business loan agreement will provide a cheaper and more suitable option for your business needs.

May be you have started to over trade and some of your clients are slow to pay, which is giving you a short term cash flow problem. In this case a cash flow projection will be all important in deciding the level of small business loan you require and the time period, plus how your repayments will need to be restructured. The same cash flow will also show income expectations both in relation to earned income and paid income.

Long-term Business Loans
Generally speaking, long-term loans (ten years or more), i.e. equity capital, are not provided by the clearing banks but are available from other institutions or some subsidiaries of the clearing banks. Banking prudence, and the principle of matching their sources of funds with their assets, means that clearing banks very rarely lend longer than ten years, unless under a special contract – five to seven years is more popular.
Long-term loans are more likely to be provided by insurance companies, pension funds, Investors in Industry, the Agricultural Mortgage Corporation and the institutions which provide industrial property mortgages, many of whom are also connected with insurance companies. These lenders are looking for a high running yield (high return) on the funds, either because they need that income to meet payments – as the pension funds do – or because that matches the type of finance which they have raised. They require a debenture to secure their loans. If you have a proven track record in running your business it might be possible to negotiate with the lending institution on the matter of how that debenture ranks against the bank, that is, who gets paid first if your enterprise fails. An understanding institution that is prepared to consider a package of loan and equity capital in which the loan is subordinate to an element of bank lending can be a marvellous support to a growing business, but do not expect such support if you have not yet proved yourself.
Contractual term loans are formalised by a specific agreement to cover a specific purpose, period and repayment programme – which might match a cash flow of a project.

Short and Medium-term business and commercial loans
Medium-term business loans are much more home-ground for the banks and finance companies. Every bank has some form of development loan scheme providing five- or seven-year money. Most have some sort of business start-up loan scheme by which they will lend money to new businesses, and hope to recover their money and make some sort of extra gain out of those which are successful. Most banks also have specific asset loan schemes for specific purchases necessary for your business.
The cost of schemes, if they involve equity options or royalties, may be difficult to quantify, although in general the banks will be looking to charge the equivalent of between three percent and five percent above base rates on the money lent. However this can vary considerably so its always best to shop around our use our business loans compared facility.
The cost of more conventional medium-term finance may be slightly less, and the banks will generally look for security in the form of a fixed or floating charge over the company’s assets. Interest margins for larger medium-term loans tend to be between 2 percent and 4 percent over base rate. A commitment fee is usually charged and the borrower is required to pay any costs.
The Export Credits Guarantee Department (ECGD) will probably be of invaluable help to any small company seeking to finance its export contracts, because it will open the way to foreign currency lending from the clearing banks.

Finding the Right Finance
For the smaller business, directors’ guarantees – usually supported by a charge over personal assets – are generally called for. The banks consider such guarantees necessary because the directors have all the assets under their effective control and the bank wishes to see that the management is totally committed. As to the security offered by the business, you might find that you could borrow up to 80 percent of property valuations – depending on the location and the economic climate. Debtors can be factored, but a bank will go most of the way to meeting working capital, so long as the overdraft is covered by stocks and debtors by something like one and a half times.
The longer the term of finance you require, the more expensive the presentation is. This is because the medium-term assumptions become more and more important and there is more to build on any established track record. Once you are asking for an element of share capital then you are getting close to putting together a prospectus on your business. It is worth stressing here that a viable project with good management does not necessarily succeed in raising finance. It has become accepted that the trouble with this country is that the banks are too unimaginative and our financial institutions too rigid and dominated by security for business proposals to get off the ground. Traditional bank finance in this country does tend to be in insufficient supply in the long term. However, considerable finance is available and is keenly seeking good projects, acquisitions, ventures and buy-outs in which to invest. Recent government budgets ought to mean even more sources of money looking for viable small businesses in which to invest.
It is rarely impossible for a proprietor to raise a modest stake himself. However, you should be aware of the increasing possibility of raising proprietor’s equity, and the tax attraction of investment by relatives and friends using the Business Expansion Scheme.
This section is by no means definitive as there are other ways of raising capital. As we have stressed many times before, unless you are familiar with financial arrangement and control, get yourself a good accountant. After all, he is not only qualified to deal with such matters, but he should also be fully aware of the opportunities which are available.

Shopping Around for loans and capital
In the case of long-term finance you are bound to find that not only will you have to talk about your proposal several times, but that it is also a good idea to arrange a tour of your operation and management for prospective financial backers. If substantial development capital is required, you may well find that the lender, who is effectively becoming the investor, would like some say in the management of your business, usually by representation on the board. Then, of course, you really must shop around. Money is available just like any other commodity. Different people place different prices on the money they have to offer – dramatically so, when looking for leasing quotes. You must shop around not only when looking for lenders of the same type of finance but also between different types of capital. It is nearly always worth getting an opinion from one of the clearing banks – from a lively, enterprising manager local to your business. Sometimes you can go the whole way with a clearing bank; sometimes you will need to move on to a development capital house, venture capital or various institutions. You need to know which corner of the bazaar to visit, and then shop around. You should not overlook government sources of finance – either from central government or from Europe, or, increasingly, from local government.
So there are seven vital factors for small business to remember:
• Prove the volume of business
• Present the case for others to understand
• Concentrate on your assumptions
• Work through a profit and loss and cash flow
• Provide a series of projected balance sheets
• Match the assets and finance you are seeking
• Monitor your business

Credit
Instalment credit (hire purchase, in colloquial terms) and leasing have a major application in financing the fixed assets of businesses. Leasing will be the more effective method if taxable profits are not yet anticipated. Instalment credit has now been extended to cover stocking finance for certain industries where the stock items are identifiable.
Factoring provides sales accounting and debt collection services, and some protection against bad debts. Usually some 80 percent of the debts due to the business is receivable immediately and the balance, less charges, is paid when the debts is recovered. There is a range of other discounting services which tend to be a little expensive but can relieve the business of time and trouble.
If you are embarking on an export programme, then letters of credit, or bills, can be accepted on the London markets and your bank will be able to do this for you.
Revolving credits are rather like household budget accounts but for companies.

Overdrafts
On the face of it the cheapest form of borrowing is often by the simple overdraft. ‘Blue Chip’ companies have frequently enjoyed overdrafts at a margin of 1 percent above the bank’s base rate. Smaller companies usually bear a margin of 2 percent to 3 percent, with new companies being charged up to four percent. The rule to remember here is not blindly to accept 4 percent if another bank will offer you 3.5 percent – change your bank if necessary.

Cheaper Business loans?
Remember competition between banks also works to your advantage. On the other hand, your bank manager may offer you a loan at a fixed rate of interest. If interest rates then rise above the rate charged, you are fortunate. However, the reverse can happen. Think very carefully before accepting, should this option be offered.
Many bank managers will have nursed along a new small business on nothing more than an overdraft facility supported by personal guarantees. As a minimum consideration, the overdraft facility should be protected by making sure that ‘hard core’ overdraft borrowing – that is the lowest level of borrowing beneath which the overdraft does not go at any time in the course of a year – should be financed in some other way. One of the most common mistakes made in financing small business, after getting the overall gearing (business loans to equity) too high, is relying too heavily on short-term credit. This pushes up the overdraft and extends creditors to such a level that all flexibility is lost.

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