Overdrafts and bank loans are the most common sources of additional finance.
Before lending, a bank will want to know that you are a good risk. Typically, the bank will want you to:
- Present a credible business plan
- Provide evidence that you have a successful track record in business
- Offer security for any money it lends you - either business assets or a personal guarantee
- Invest some money in the business yourself
If you don't meet all the bank's normal requirements, you may qualify for a loan under the government's Enterprise Finance Guarantee scheme.
Whatever type of borrowing you use, you may have to pay arrangement fees as well as interest.
Many small businesses use an overdraft to cover their borrowing needs. If you need longer term financing, it's a good idea to consider taking out a loan.
Advantages and disadvantages of overdrafts and loans
- A flexible way of funding your day to day financial requirements
- Interest is only payable on the amount you are overdrawn
- Higher interest rates than loans
- Leaves you with no contingency funds if you are regularly overdrawn
- Bank can ask for repayment at any time
- You can match the term of a loan to your requirements
- Easier to budget for repayments
- No flexibility - you could be paying interest on funds you are not using
- Regular payments could cause cashflow problems
- You may have to offer some form of security
Always take advice from your accountant or business adviser to ensure the loan meets your requirements and you understand the terms before signing any agreement.
There is no guarantee that your application for finance will be successful. If you have had difficulty accessing bank finance
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