Friday, May 15, 2009

Getting business finance from the bank

A large number of start-up businesses call on their bank to borrow money. If you're reading this blog then you may be one of them or certainly may be planning to be. Banks offer long-term finance in the form of loans and mortgages, and short-term finance through authorised overdrafts. But before you approach your bank, you should first work out why you need the money and for how long.

For long-term purchases – new machinery or premises, for example – then a loan or commercial mortgage may be best. Leasing or hire is another option if it’s equipment you need.

Short-term day-to-day running costs (such as buying stock, or tiding you over until cash comes in from a customer) are often best met by authorised overdrafts or short-term loans. When looking at these options, obtain written quotations for each, so you can accurately compare total costs, including bank charges.

Loans
If you need the money for more than a year, for a specific purchase or planned expenditure, a loan is a good solution. You agree to pay back a set amount each month over a specified period.
For long-term borrowing they’re often cheaper than overdrafts – usually around 2.5 per centover base rate (an overdraft can go as high as Seventy per cent of small businesses call on their bank to borrow money.

Banks offer long-term finance in the form of loans and mortgages, and short-term finance through authorised overdrafts. But before you approach your bank, you should first work out why you need the money and for how long. For long-term purchases – new machinery or premises, for example – then a loan or commercial mortgage may be best.

Leasing
Leasing or hire is another option if it’s equipment you need Short-term day-to-day running costs (such as buying stock, or tiding you over until cash comes in from a customer) are often best met by authorised overdrafts or short-term loans.

When looking at these options, obtain written quotations for each, so you can accurately compare total costs, including bank charges.

Loans
If you need the money for more than a year, for a specific purchase or planned expenditure, a loan is a good solution. You agree to pay back a set amount each month over a specified period.
For long-term borrowing they’re often cheaper than overdrafts – usually around 2.5 per cent over base rate (an overdraft can go as high as

What you should be aware of:
 The bank can call in an overdraft at any time
 You may still have to provide security
 If borrowing to fund a long-term purchase, an overdraft will probably cost more than a loan
 If you exceed your overdraft limit, you could pay high interest rates and penalty charges and your cheques could be bounced
 Overdrafts have to be regularly reviewed


Costs involved
Whether you choose a loan or an overdraft the amount you pay back depends on the interest rate charged, the amount you have borrowed, any fees or repayments. The interest rate will be fixed or variable. With a fixed rate, the interest remains constant throughout your repayment period. With a variable rate of interest, the interest fluctuates with changes to the Bank of England base rate.

Repayment schedules
It may take from one to 15 years to repay your laon. The longer the payback period the more interest you’ll end up paying. When comparing different loans and overdrafts, look at the annual percentage rate (APR). This is the rate it will cost annually once all charges are accounted for. Check the small print for hidden costs. For example, if you want to pay the loan off early, are there penalty charges? Do you need payment protection insurance?

What the bank looks for
The banks we speak to say that banks look at three key areas when deciding to say yes or no to a loan or overdraft request.
Most commonly, they will look at the business and the business plan. In adition, the person asking for finance, the impression they make and their record as a business or personal customer. Then the proposition: will the investment generate sufficient cashflow to repay? This becomes more crucial the bigger the deal is in relation to the size of business and the amount of experience the prospective borrower has.

These are some of the issues you need to take into concidderation when approaching the bank for finance, most of which we cover at our business planning workshops, held regularly accross the country. Visit our website for details or fill one of our contact forms in and we will be in touch.

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