Tuesday, November 26, 2013

Money Lending Options for Small Businesses

Finding finance for small business is a question of timing, skill and money. The timing needs to be right in order to attract the customers your business needs. You need to have the skills required not only to set up a business but to maintain it successfully. Unfortunately, in many cases, money is a vital part of turning your business idea into a reality. Here, we examine where to get small business loans, in order to help you determine what the best course of action is in terms of securing the finance for your business. 

Option One: Money Advances

Taking a money advance involves being lent money according to your business turnover. By analyzing your sales, a loan fee is calculated and added to the advance. Repayments are then deducted from each card sale transaction processed by your business.

Pros: Repayments are made in proportion to the sales your company makes. So taking a money advance makes paying back the loan extremely manageable, particularly for new businesses that may be unsure as to precisely how much of a monthly repayment they can afford. You will also avoid the temptation of borrowing beyond what you can afford to pay back.

Cons: Interest fees may be higher than with other types of loans, so do your research before committing. This may not always be the case, however.

Credit Card Borrowing

Credit card borrowing is the process of either paying for items using a credit card, or transferring money from a credit card to a bank account.

Pros: Credit card borrowing is a quick and straightforward way to borrow money. If a business owner already has a credit card, he will be able to borrow instantly. If not, many credit cards can be applied for online within a matter of minutes.

Cons: Credit cards are usually accompanied by high interest rates. As such, penalties can quickly be incurred for not paying the full amount outstanding within one month of the purchase. New business owners may soon find themselves faced with both a large credit card bill and a hefty indent in their bank balance – hardly conducive to establishing a positive cash flow.

Bank Loan

Business owners can sometimes apply for and receive a loan from a bank.

Pros: The loan is available for the entire period of the loan, as it is not repayable on demand. You may be able to negotiate a repayment break and the loan can be linked to the lifetime of the assets or other equipment you are borrowing to pay for. Interest rates are fixed, so there will be no nasty surprises when inflation rates go up or down.

Cons: You may have to give the bank manager information appertaining to your business on a quarterly basis, which can prove an administrative burden. Bank loans tend not to be flexible so you may end up paying interest on funds you are not using. In addition, if your customers are late with their payments, you may struggle to repay your loan on a monthly basis. Possibly the most serious disadvantage to having a bank loan is that loans may be secured against personal assets, for instance your home. You may also have to pay a fee if you wish to repay the loan sooner than the end of the term.

Using Other Lenders

In 2013 there are many other options available to those wishing to borrow money for setting up a business. A variety of reputable and legitimate lenders exist on the Internet high street, offering deals on lending certain amounts of money.

Pros: Using an independent money lender gives you more flexibility. Money lenders will be able to offer you a selection of options when borrowing money. For instance, you can choose between fixed monthly repayments, a money advance repaid as a proportion of your sales, or the option to pay interest-only on the loan for a fixed period of time. By using an independent lender, you can quickly solve your cash flow needs without having to go through any long drawn-out processes.

Cons: Although most lenders are legitimate, there will always be the odd one or two who are out to scam. Make sure the company is regulated by the Financial Conduct Authority and go through all the paperwork, contracts and lending agreements in detail. 

Bank Overdraft

Many business owners will have business accounts with an overdraft facility. If the bank balance goes below zero, the account is overdrawn and interest is charged at a pre-agreed rate. Having a bank overdraft means a person is able to spend more money than they actually have, in return for paying certain fees.

Pros: A pre-arranged bank overdraft is easy to access and can be reassuring to have ‘just in case’. Provided you stay within the agreed limits of the loan, your interest rates are stable, although they may change year to year. The interest charged may also be lower than in the case of credit card borrowing or a loan from elsewhere.

Cons: If the overdraft is not arranged in advance, a charge is likely to be incurred for using the overdraft facility without prior approval. In addition, if the negative balance is beyond the amount agreed, then the bank may charge additional fees. At the same time, higher interest rates may apply. It can be harder to keep track of borrowing using an overdraft, rather than borrowing a set amount and paying it back over a period of time.

Overall, the choice of money lending options is wide when we consider business loan finance. Out of all of those listed here, a money advance seems the most appropriate choice for a new business, as you can pay the money back gradually as your business becomes more and more profitable. Alternatively, finding an independent lender might give you more flexibility, compared to the rigid terms and conditions imposed by big banks or credit card companies. For instance, you can choose from a fixed repayment scheme, an interest-only scheme or a pay as you earn money advance borrowing plan – whatever suits your individual needs best.

Author Bio

Alisa is a finance blogger specializing in SMEs and new business start ups, she also works closely with Merchant Money - http://www.merchantmoney.co.uk/ who offer affordable business loans and flexible funding.
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