Obtaining a loan and offering security

When securing a loan, there are certain requirements you may need to fulfil. Most lenders require you to:

  • Find a contribution to start your business - at least the same as you want to borrow. Demonstrating that you have taken on personal financial risk to set up your business will prove to a potential lender that you are committed to its success.
  • Show that you have contingency plans for repayment of the loan if things go wrong.
  • Offer something as security - get professional advice from your solicitor before entering a secured loan arrangement. Decide what personal and business assets, such as equipment and buildings, can be used as collateral for a loan.
  • Keep lenders informed of your progress, particularly any changes or problems. The overall personal impression you make to a potential lender is important. They may scrutinise your educational background, your business experience and your employees. Research has shown that the smaller your business, the more closely you are likely to be personally evaluated.
  • Have a comprehensive business plan. Cashflow is an area which will be closely scrutinised, as will your payment record with other creditors.
  • Banks or building societies are used to working with new businesses and can offer advice as well as deals to meet varying business needs. They may offer ways to help you manage your cashflow and the cost of borrowing, such as set-off facilities that allow credit on one account to offset a debit on another, reducing your overdraft charges.

Negotiating the terms of your loan

A loan agreement can be a long, complex document. How you agree a loan will impact on the health of your business. Remember that almost everything is up for negotiation. Aside from discussing basic issues, such as the due date of the loan and the interest rate, you also need to establish what the loan fees are. Ensure that you will have the flexibility to pay off your loan earlier than the due date and try to avoid a penalty. Negotiate for a capital reapyment holiday period for your payment schedule (i.e a period where you can pay the interest only).