What you need to know!
UK business
If you run your own business, you could probably benefit from opening a specialist, dedicated current account for your company. Offered through all of the usual banks and building societies such as Barclays, Lloyds, Natwest, Santander and more. Along with specialist providers, business bank accounts offer debit cards, overdraft facilities, cheque books and automated payments such as direct debits and standing orders, just like a personal account does.Over and above this, a business bank account usually offers a range of additional benefits. These can include change facilities, the option of a much higher overdraft, business loan, access to business guides and training materials, the use of communal meeting rooms and business-class travel facilities, foreign exchange rate discounts, fast international payments and insurance.
Although there is no legal obligation for companies to hold an actual business bank account, it is vital that the business's monetary affairs are kept separate from personal ones. However, if you are a start-up company or you work as a sole trader and do not think you need any of the additional benefits that a business account offers, a separate personal account will suffice.
Anybody that runs a company of any size is usually eligible to apply for a business bank account, though credit rating restrictions will apply. Some banks provide different accounts depending on the size or type of the business.
The most basic business banking accounts are free. For anything more complicated you'll pay either a flat monthly fee, or pay-as-you-go by the transaction, or a mixture of both.
There are many different kinds of loans available to meet the needs of business owners. However, not all loans are created equal, and determining which ones are best suited to your needs can be complicated. That is, unless you know some of basic terminology associated with the various types of small business loans. This article is a primer on the types of small business loans.
Secured Loans
With a secured loan, your business is awarded a loan because you are putting up business or personal assets as collateral. This collateral is promised as repayment if you are unable to meet your repayment obligations.
Unsecured Loans
Unlike secured loans, an unsecured loan is awarded based on your creditworthiness. You don’t have to provide collateral to obtain the loan. Unsecured loans are riskier for lenders than secured loans and are typically awarded in smaller amounts.
Professional Loans
Professional loans are available for sole-proprietors. You might consider a loan of this type if you are a doctor, dentist, or lawyer with a private practice.
According to Nigel Lander, a specialist finance adviser for Business Link, raising finance for start-ups or early-stage businesses is very difficult. One way that will increase your chances is to prove that your business has clearly-defined income streams. If you show that your business will have money coming in, it will be easier to persuade the banks to provide finance.
“Bank finance is essentially for lending against anticipated income streams. For a very early-stage business, banks might come up with a small amount of money to match what the owner is putting in, on a pound for pound basis. Make it work at a modest level,” advises Lander.
If you have very little or nothing to put into the business, it will be extremely difficult to convince the bank to part with money. To heighten your chances, try and raise money from as many other sources as possible, such as your friends and family, any retained profits you may have, or a third party investor. Banks want to see commitment from the business owner’s end, so you will probably have to come up with some kind of security as a form of guarantee, such as your house.
A watertight business plan
When approaching a bank, your business plan and how you deliver it should be the best it can possibly be. If your bank manager is your best possibility and you have not practised your presentation, you might blow your chance of accessing finance. To lessen the risk, you could try approaching a different bank to do a ‘test run’ for practice.
“Many applications for finance get turned down because they are badly written or presented, and many get turned down because they are presented to the wrong people,” says Lander.
According to Guy Herrington, marketing director for business banking at Lloyds TSB, a well-prepared business plan is essential when approaching a bank, and many banks have packages to help you write and prepare your business plan.
“Banks decide to finance businesses on a case by case basis really. Less than 40% of customers actually borrow money when they are in the early stages of their business. Most will use funds from trade creditors or their family,” says Herrington.
Prove your management ability
Another factor affecting whether a bank will agree to finance your business is your track record and management ability. Can you make the business work, and do you have a background in the sector are questions you should ask yourself.
“The quality of the management team is always a major consideration. To help you, make sure you have support from a third party who has experience in areas where yours may be lacking,” suggests Lander.
Lloyds TSB’s Herrington says that it can be useful if you have a track record, but it is also worth highlighting any other relevant skills that you can bring to the business.
The bank’s view
At the end of the day, banks never finance anything on a 100% basis, otherwise they may as well be running the business themselves. They will always be looking to finance businesses on a partnership basis, and will always want a contribution in, for example, monetary terms from people running the business.
Remember also that each branch manager has a different discretionary lending limit; above the limit your application may need to be processed elsewhere, which means you could lose part of the ‘personal’ touch. The moral is to shop around, and certainly do not be put off by being turned down
New loan scheme to fund your business
A not-for-profit bank has opened in East London to provide financing to sole traders and micro-businesses (those with fewer than 5 employees), which do not usually qualify for loans from mainstream banks.
Street has a fund of around 4.5 million and provides an average loan of 2,000 to qualifying start-up companies. The maximum term for an initial loan is 12 months, but a business can then return for a further increased loan after that.
Deputy chief executive Martin Hockly wants Street to support businesses that might otherwise use inappropriate funding such as credit cards or personal loans.
Hockly says the main criterion is that the applying company must be trading, but also points out it must be legal too. He adds. We don't require formal business plans and accounts.
To apply, a business must call Street and complete an application form over the phone, which is then sent to the applicant for signing. The bank will then meet with the business to discuss the current and potential state of cash-flow over the next 12 months and develop a business plan.
The bank will then conduct due diligence into the business to ensure it is the sort of enterprise Street wishes to support and the business must provide a guarantor and 2 referees. Hockly claims the whole process can be completed in just a few days.
For more information or to apply for a loan, call Street on 0845-601 8690.
US business
Conventional Loans
Conventional loans are private loans issued by banks and other lenders. The federal government does not guarantee conventional loans; the lender is responsible for assessing risk.Government-Backed Small Business Administration Loans
SBA loans are guaranteed by the federal government; however, there are typically stricter eligibility requirements. Businesses in certain industries -- such as residential property holding companies and lobbying organizations may not qualify for SBA loans.Among SBA loans there are several different classes listed below, including general small business loans (and related subcategories), micro loans, real estate and equipment loans, and disaster loans
General Small Business Loans
SBA 7(a) loans are the most common types of loans. These loans provide financial relief to small businesses and have various eligibility requirements. Within this category of loans there are four specific SBA programs:- CAPLines: This SBA program is for business loans up to $5 million, and it is established to help small businesses meet their short-term and cyclical working capital needs. Within this subcategory of loans are four additional subcategories: Contract Loan Program, Seasonal Line of Credit Program, Builders Line Program, and Working Capital Line of Credit Program.
- SBA Export Loan Programs: This loan program is specifically for small business exporters. It’s designed to help business owners start or expand export activities within their company.
- Advantage Loans: Advantage loans include the Small/Rural Lender Advantage Loan, the Community Advantage Loan, and the Small Loan Advantage. What sets these programs apart from other 7(a) programs is the kinds of lenders that are able to obtain a guarantee.
- Rural Business Loans: These loans are part of a special program for businesses located in rural communities. Rural business loans are managed by the US Department of Agriculture (USDA) under the Business and Industry Guaranteed Loan Program. With rural business loans, up to 80 percent of the loan amount is backed by the USDA.
Microloans
The SBA’s microloan program is designed to help business owners acquire loans for $50,000 or less. According to the SBA, the average microloan runs about $13,000. A microloan can be used for several purposes: to provide working capital or to purchase furniture, fixtures, inventory, supplies, machinery, or equipment.Real Estate & Equipment Loans
Real estate and equipment loans are part of the SBA’s CDC/504 Loan program. They can be used to finance major fixed asset purchases.Disaster Loans
Disaster loans are low-interest loans (offering rates anywhere from 4% to 8% maximum) and can be used to make repairs or buy replacements for real property, machinery, equipment, fixtures, inventory, and leasehold improvements. They are only available to businesses located in a community that has officially been declared a disaster area.Remember that financial products are updated frequently. Check with a private lender or the Small Business Administration to see if other loans are available to help you grow your small business.
Microloan Program.
Under the Microloan program, the SBA works with designated intermediaries to provide small short-term loans for working capital or the purchase of inventory, supplies, furniture, fixtures, machinery and equipment. Despite Government cuts he Microloan program is set to continue but you should check with your local SBA office to find out its availability.
CAPLine Loans.
The CAPLine loan program makes loans available for businesses that need funding for a short time in order to "finance seasonal working capital needs; finance the direct costs of performing certain construction, service and supply contracts; finance the direct costs associated with commercial and residential construction; finance operating capital; and consolidate short-term debt." Loans are available under several programs.
When you go to a bank or the Small Business Administration (SBA) for a business loan, you will be required to complete a loan application form. You must provide much more information than you might think, and your ability to provide timely and complete information can mean the difference between getting the loan or not.
Using the application for a Business Loan as a guide, here is the information you need to provide:
- Information about your business, including business name and address, your name, type of business, date business established, Tax ID Number (Employer ID Number) or Social Security Number (for a sole proprietorship) for USA.
- Number of employees, now and if the loan is approved
- The name and information about your business bank
- Use of proceeds (amounts for all applicable items, and total):
- land acquisition,
- new construction/expansion/repair,
- acquisition or repair of machinery and equipment,
- purchase inventory,
- working capital (including accounts payable),
- acquisition of existing business
- to pay off an existing loan
- Borrower's name
- Lender name and information
- Original amount of loan
- Date of Application
- Present balance
- Rate of interest
- Maturity date
- Monthly payment
- Security provided
- Loan Status (whether the loan is current or past due or paid off)
- Outstanding balance
- If loan resulted in a loss to the government or other lender, amount of the loss
- Information about the management of the business. For 100% of the ownership, you must include name and address and percentage owned. You may also be required to provide demographic information (race, ethnicity, veteran status, gender); this information can help the bank determine if you qualify for any special SBA loan programs. A resume of each executive, board member, and other key employees may also be requested.
- Personal and financial information about all shareholders (with 20% or more of ownership), officers, partners, owners, including a personal financial statement.
- Detailed information about assets being presented as collateral. For example, a legal description of real estate, serial numbers/id numbers for all large value machinery, equipment, furniture and fixtures, inventory records, accounts receivable aging reports. and other records as required.
- A brief history of the company and the benefits that it will gain from the funds.
- One to three years of projected financial information on the business, showing the effects of the funds.
- Finally, you will be required to provide information about the financial history of the business for the past three years, if possible, including income tax returns balance sheets, and income statements.
References: Small Business UK, J Murray - US Business.
