Financing your start-up

Loans and overdrafts

There are different sources of borrowing when starting or growing a business. Loans and overdrafts - two of the most popular sources of start-up funding have different advantages and disadvantages.

Business Link provides advice on the advantages and disadvantages of loans and overdrafts.

Loans are generally most suitable for paying for assets, like vehicles and computers, for start-up capital and for other cases where the amount of money you need is not going to change.

Some lenders may require a loan guarantee before they will give you a loan. This ensures that they will get their money back even if the business is not successful.

It is not a good idea to take out a loan for ongoing expenses. Expenses are best funded from the cash received from sales, possibly with an overdraft as a backup.

Where and how to get a loan

Banks and building societies are the main source of small business loans, but many other companies provide loans at very competitive rates.

The British Bankers' Association provides information about business accounts and how to compare them.

Borrowing from a bank or building society can be attractive because they 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.

If you are in doubt as to a lender's credentials, it's a good idea to check this out. You can find out whether a financial services firm is regulated, at the Financial Services Authority (FSA).

Most lenders will require you to:

come up with a share of the capital to start your business - at least the same as you want to borrow
have a fall-back option if it all goes wrong - some sort of insurance
offer something as security - you should take professional advice before entering a secured loan agreement
keep them informed of your progress, particularly any changes or problems
have a comprehensive business plan

Overdrafts

An overdraft can be an expensive way to borrow long-term, as the interest rate tends to be higher than that of a loan.

Bear in mind that what starts out as a good deal may change, and so may your business needs. It's worth reviewing your options regularly.

Other sources of finance and advice

When setting up or developing your business, there are many sources of finance. It is important to take time to look at all of the options, and work out what best suits your business needs.

Business Link provides advice on finding and managing the money
Business Link for London offer a range of finance services to support growing businesses, including
- Recommendations of suppliers of professional financial advice, e.g. accountants
- Guidance with preparation of your funding application
- Post-funding support in the effective use and management of finance
Prime is aimed at people over 50 setting up businesses.
Prince's Trust targets those under 30 years of age setting up in business. The Trust can help young, unemployed people under 30 start businesses.
Industrial Common Ownership Finance (ICOF) - for co-operatives, employee-owned businesses and social enterprises.
The Islamic Banking and Insurance provides advice about the promotion and implementation of Islamic finance.
The Department of Trade and Industry offers advice on sources of funding and information on the DTI’s Small Firms Loan Guarantee.
Get expert advice from the Shell LiveWIRE mentor service.

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