Despite Prime Minister David Cameron referring to small business owners as “national heroes,” it’s a problematic time for self-employed entrepreneurs looking to secure a business loan. Here’s a breakdown of the options available to you right now.
Due to expensive upfront costs and regulation related hurdles, smaller businesses are often not able to access the debt and equity markets for financing purposes. Therefore, they must rely on financial institutions to meet their needs. A commercial, or business, loan refers to a debt-based funding arrangement that a business takes out with a financial lender. This is the most common way businesses look to secure funds as the extra capital allows them to fund expenditures that they otherwise wouldn’t be able to afford. Similar to consumer credit, businesses have a variety of lending products to choose from, such as term-based loans or unsecured loans.
Home Equity Loan
For business owners who are also homeowners, you could consider a home equity loan. These loans generally offer interest rates that are both more flexible and lower than traditional commercial deals. However, the risk is that you are essentially putting your home on the line. If your business venture fails, or you fail to maintain the terms and conditions of the lender’s loan agreement, you run the risk of possible foreclosure.
If you’re concerned about the potential debt that could accrue from a commercial loan, you could consider loaning money against a piece of collateral. Traditional pawn broking is the oldest and simplest form of lending. Specialists like H&T Pawnbrokers do business loans up to £50k and you can secure loans against precious metals, jewellery, or other items of high value. Your loan is secured against the value of your asset and once the loan is repaid your items are returned. The term of the loan is 6 months, but you can repay at any point with no early redemption charges.
The “wild card” of the bunch. Crowdfunding is a recent initiative popularized by online services like Kickstarter or Indiegogo. Crowdfunding works by allowing a number of individuals to each pay a small amount of money to a business in the hope it amounts to the original targeted goal. This might be to bring a product to market or improve a service already in development. To incite the public in you, you generally have to offer them something substantial in return. Most commonly, this is your product or service as well as various bonuses related to your initiative.
You should consider all of the above options and decide which one works best for you. Good luck in your efforts and let us know about any of your business financing experiences in the comments below.