When starting a new venture, business owners will often need some cash to get the business up and running. When approaching lenders, you may find that they ask for tangible security – that means taking a charge on your assets, such as property. The reason for this is clear: new businesses are a risky investment for lenders, and so they seek to cover their risk by taking security. However, as the borrower, you may be reluctant to put your house on the line. So what are your options to borrow money without providing tangible security?
An important point here is that virtually all lenders will ask the directors of a new business to provide personal guarantees. That means that, in the event of the limited company going bust, the lender can still chase the directors for repayment of the debt. This is not the same as taking a charge on the property, but nevertheless means that directors have to take personal responsibility for the money they borrow.
High Street Banks
In theory at least, the mainstream banks will lend up to £25,000 unsecured to small businesses. However, in the case of start-up businesses, where the risks are greater, they will usually be more reluctant to lend that amount. In order to get unsecured borrowing from a High Street Bank, your business plan will have to be well constructed, the directors will need a strong track record, and the forecasts will need to be realistic and credible.
Start-Up Loans are a government-subsidised product that provide new businesses a great option for unsecured borrowing. Recognising that there was a funding gap in this area, the government has provided money to lend to pre-start and early stage businesses. It is a loan, not a grant, and of course you have to pay it back, but the interest rate (6% fixed) is far cheaper than other unsecured options. More importantly, they are prepared to lend to businesses that banks might consider too high risk. The maximum amount is £25,000 per director.
Information can be found at the Start-Up Loans website (www.startuploans.co.uk), but the loans are administered by regional delivery partners. In North Yorkshire, those partners are Business Enterprise Fund and Finance For Enterprise.
There are specific online lenders who offer short term unsecured borrowing to start-up and established businesses. Generally, these are much more expensive, but can be a good option if the cash requirement is short term. Typically, the maximum loan term is twelve months, and interest payments are made daily.
Friends and Family
The problem for any lender is that they don’t really know you. All the business plans and forecasts in the world only give them a flavour of who you are. If you have someone close to you who is willing to invest in helping you to get your business off the ground, they will know you well enough and may trust you with their money. For relatively small amounts of money this is often a key first step in financing a venture.