Every start-up entrepreneur needs funds to start a business, the amount of which depends on the subject of the business. When is it advisable to take out a loan from a bank? The Hoxton Mix team will advise you on what types of business loans exist when you discover how to register a business in the UK. Let’s find out where there are good solutions and what you should pay attention to.
Equity VS. debt capital
There are several ways to get financing for your business. Basically, we distinguish between two groups of funding sources:
- equity (money that you, as a business owner, invest in the business, e.g., share capital, profits used for further business development, or asset depreciation)
- foreign capital (for example, commercial and bank loans for entrepreneurs).
What kind of capital should I choose for business financing?
You should always consider the specific circumstances of your business to determine the appropriate type of financing. If you are just starting your business, you may come home empty-handed when applying for a loan. Banks usually lend money to established companies. As a start-up entrepreneur, you have no choice but to finance your business from your savings (equity) or borrow money from friends.
But there are also situations when banking institutions allow you to take out a loan even at the beginning of your business. However, the amount of the loan will not be staggering, and the interest will not be very favorable. In the following paragraphs, we’ll tell you what you need to do to increase your chances of getting a loan and tell you which loans are easiest for you to get.
First, find out the value of your equity. Foreign capital is indeed cheaper than your own when you register your company in the UK. Why is this so?
- the interest paid on the loan is a tax-deductible expense (cost) – despite the higher price (interest), foreign capital reduces the tax burden because entrepreneurs can reduce their tax base by the interest paid,
- you cannot invest the money invested in the business elsewhere – this is professionally called the opportunity cost, which means that by investing in the company, you give up the opportunity to invest, for example, in equity funds, which have a return of about 8-12% per year,
- the high risk of investing in a company that has not yet been established should be compensated by the higher expected return.
Equity, on the other hand, contributes to the financial stability of your business. You can lose the maximum amount of your invested money. If you fail to repay the bank loan, you can also lose money you have outside the business. This can happen, for example, if you sign a promissory note to the bank before the loan is disbursed.
Therefore, when deciding on the choice of capital, consider how much you can earn by investing your funds, for example, by saving up, and what percentage of the interest rate on a loan for entrepreneurs the bank sets. If the interest rate is lower than the proceeds from the funds, it is worth taking out a loan.
Things to consider before applying for a loan
Check whether you need a loan at all. Is there another way to raise funds? For example, instead of buying an expensive car, you can rent it, which will cost you less in the beginning. If you’re looking for a place to run your business, ask friends first and settle for fewer luxuries for the time being. Instead of buying a new car, take one from the market or use a friend’s car for a while.
Also, think about possible problems with repayment. It’s better to start a business slower and make larger investments when you have stable sales. This way, you enter the business with less risk (and more securely).
Loans for entrepreneurs
Operating loans – intended for short-term financing of business or trade and also include overdraft, operating, and investment loans.
Operating loans for entrepreneurs and start-up companies
Unlike investment loans, which are usually impossible for start-up entrepreneurs and self-employed people to obtain, operating loans seem to be a more affordable option.
Business loans differ from consumer loans in that banks provide them using the ICO number, not the applicant’s social security number. The difference is also in the documents submitted. For a consumer loan, the bank is interested in the amount of your income, expenses, and entries in bank registers.
In the case of an operating loan for entrepreneurs who register a firm in the UK, in particular, they check:
- business history,
- business plan
- collateral (surety),
- whether you owe money to a financial institution, social security, or health insurance company (in other words, the bank checks your debt-free status).
To get a loan from a bank, ideally, you should present:
- a copy of the tax return (preferably for two completed periods),
- proof of payment of tax (bank statement or receipt),
- a certificate of no debts from the tax office, health insurance company, and social security office,
- identification card,
- an extract from a commercial or trade register.
The documents submitted vary depending on the bank, loan amount, and type of business. In some cases, banks require very detailed information from loan applicants, such as their marital status, credit history, education, or previous employment. In other cases, they want to know the names of several of your customers and suppliers.
To get an express loan for entrepreneurs, you only need an identity document or a certificate of income (often accompanied by a higher interest rate).
You can increase your chances of getting a loan by doing the following:
- a good business history,
- a well-developed business plan
- or loan collateral (surety).
As an entrepreneur, you most typically guarantee a bill of exchange, but also, for example, goods that you need to pay for or personally owned real estate. And when you buy a car for your business, you insure the car you buy. You take out a loan or lease.
Conclusion
Raising finance is therefore a critical step for any aspiring entrepreneur starting a business. Understanding the differences between equity and debt capital is essential to making informed business financing decisions.
Before applying for a loan, entrepreneurs should carefully assess their financial needs and explore alternative financing options. It is important to weigh the benefits of credit against the potential risks and to develop a realistic repayment strategy. Operational loans, including overdrafts and investment loans, are viable options for meeting short-term financial needs, albeit with different requirements and documentation.
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