Running a business is a difficult affair that requires commitment, dedication, and finance. A good business plan will help a lot!
The key to success is actually in safeguarding yourself, which means you need to know the right entity to use before you even begin trading. But, to really achieve success, you’re going to need to invest in your business. If you don’t have the funds available yourself, you’re going to need to find some finance.
The easiest option is secured business finance, but there are strict criteria a lender will look for. It’s a good idea to know what these are before you apply.
What Is Secured Business Finance?
Before you look at the criteria it is useful to understand that secure business finance refers to when your lender takes security out on a physical asset. This asset may be machinery or equipment that your business owns, or it can be your home.
The security gives the lender reassurance that they’ll get the funds back, even if something goes wrong with your business.
Of course, this means that if you are unable to make the payments the lender will have the opportunity to take the secured item instead; to cover the value of the loan.
The good thing about secured loans is that you’ll be able to borrow much more funds than with an unsecured loan.
One of the safest bets for a lender is when the company already owns a physical property. This is a tangible asset, the lender will loan up to as much as 80% of its value; allowing it to take control of the building and sell it for less than it’s worth, if necessary.
However, if you don’t have a property the lender will happily look at anything which is worth more than the funds you want to pay; as this will give them the safety they need.
It is important to note that the asset cannot be sold or used to raise extra finance while the lender has security on it.
A lender may want a personal guarantee to assist give them the confidence to lend you money. This is often the case if the company doesn’t have sufficient collateral or if it is a limited liability company or partnership.
Your own personal guarantee will mean that personal assets are eligible to be taken if your business is unable to make the necessary repayments.
Of course, every lender has a different approach and requirements; you should verify what they are before you apply.
Business Cash Flow
It is highly likely that a lender will want to see your profits and losses; most lenders are more eager to lend funds if you’re making a profit as they’ll feel it increases the chances of them getting their money back.
However, making a loss doesn’t mean you can’t get a loan. What you’ll need is a good business plan and cash flow statement. This will demonstrate to the lender that you have a good grasp n the market and a solid plan to turn your losses into profit, or simply improve your profits.
A good cash flow statement should be realistic, this will show that you can afford to repay the funds you want to borrow.
The trick is to consider what facts and figures about your business would make you feel confident lending it money if you were the secured lender.
In short, you should put yourself in the lender’s shoes.
It’s important for a lender to have confidence in the management structure. A business which has had the same management for an extended period of time is more likely to be stable and able to deal with future issues.
It is also a good idea to be able to show the skills that each member of the management team has and how they relate to the success of the business now and in the future. If the management team is recent then you need to be able to demonstrate the necessary leadership skills exist from previous businesses/employment.
When the lender does checks they are likely to check the credit of any of the people listed as applying for credit; or the directors if it is a company applying. For this reason, it is important to check and clean up your credit record before you apply for business finance.
The better your personal and business finances look the more confidence the lender will have in you and your business. This makes it much more likely that they will lend you the funds you need.
Breakdown of personal credit scores:
Finally, most secured lenders have some flexibility. Be prepared to work with them in order to get the funding you need. The better prepared you are the more seriously they will take you and the more likely it is that you’ll be able to tweak any process to get the desired result.
Just be honest with yourself when preparing statements; this will help to ensure your company really can repay the funds.