When it comes to financing to start a small business, it’s important that you know what’s available to you so that you can realise your idea without leaving yourself personally vulnerable.
Of course, you’re quite entitled to dip into your savings to kick-start your venture, but funds can quickly run out that way.
According to a study by the now-defunct Geniac, the average UK start-up spends £22,756 in its first year. Meanwhile, figures quoted elsewhere suggest it can cost as much as £100,000 to start your own business. The costs you have to pay out will ultimately depend on the type of business and industry in which you intend to operate, and even where you are in the country.
Understanding your business costs
It’s no easy task, but it’s important that you try to define your costs when starting a small business. While it’s impossible to foresee all the costs you’ll have to pay out, you can generate a ballpark figure based on anticipated expenses such as product development, premises & vehicles, licence & permits, insurances & taxes and so on.
Due to the unpredictable nature of the first year of business, you should also factor in an allowance for unexpected costs, including those caused by payment delays, credit card fees, bank fees, and financial emergencies of any kind.
Weigh up your options
With an idea of what it’s going to cost to run your business for the first year of trading, you can start to consider how much money you’ll need to borrow and the best way to go about it.
It's common in the early stages for parents, siblings or friends to financially support your business. But borrowing money ‘close to home’ can go one of two ways. If your business proves to be an immediate success, you’ll be able to pay them back with a nice slice of interest on top. On the flipside, it might take your business a while before it’s in a position to reimburse them, which could present problems you could do without.
Another popular initial way of financing to start a small business is via the Government-backed Start Up Loan. Under the initiative, you can apply for a loan for anywhere in the region of £500 to £25,000 to start or grow your business. Start Up Loans are charged a fixed interest rate of 6% per year and you can repay it over a period of one to five years.
If, based on your cost calculations, you think you’re going to need more than £25,000 to survive your first year of trading (and beyond), you might want to consider a small business loan from one of the high-street banks. Some UK banks allow their business customers to borrow up to £50,000 (subject to approval), with borrowing terms of up to 10 years.
Picking the right financing to start a small business depends on your circumstances, credit rating, business experience, and funding needs. Take the time to go over all the business finance options before you decide to add leverage to the business.
Protecting your personal assets
Business owners are often put under substantial pressure to give Personal Guarantees to get their new business up and running or to secure crucial funding for an already established business.
In many cases, lenders will only agree to provide the necessary funds if the company’s obligations are supported by a Personal Guarantee from one or more of the individuals who own it.
Put simply, a Personal Guarantee places the director’s personal assets at risk should the borrower default. Therefore, Personal Guarantees shouldn’t be taken lightly or without a full understanding of the implications should the business not work out as you’d envisaged.
At the same time, if signing a Personal Guarantee is the difference between you being able to realise your dream of starting a business and not, you need to give it due consideration. Every business owner takes a risk when starting a company – it’s about being brave at the right time; weighing up the risk-reward element and moving forward with speed and sureness.
It’s also worth noting that, if you’re required to sign a Personal Guarantee to be able to borrow additional funds from a lender, you can moderate the risk with Personal Guarantee Insurance.
By covering the borrower’s risk in the event of a Personal Guarantee being called in, insurance guarantees lenders that a percentage (up to 80%) of their loan is repaid to them.
Purbeck Insurance is a specialist Personal Guarantee Insurance underwriter, authorised and regulated by the Financial Conduct Authority. We work alongside lenders and brokers to provide a bespoke insurance solution based on the lender’s individual requirements and risk profile. Please contact one of our specialists today to learn more on 0208 004 7250.