Borrowing money against your business - a beginner’s guide

Alex Ewen

23 March 2020 10:29 GMT

Every business needs to be able to borrow money, as few companies have much capital on hand when they need it due to growth and reinvestment back into their companies. That means it’s essential to have access to options for borrowing money against your business. In this guide we’ll lay out some of the ways you can do this, so you can start planning for business success.

Borrowing from a traditional bank

This is the most straightforward way to borrow money against your business. You’ll simply go to your bank, tell them how much money you need and what you need it for, and they’ll decide whether to offer you a loan or not. Typically this type of loan requires you to post collateral or a personal guarantee, making it a secured loan. That means the amount you borrow is limited by the value of the assets you can secure against or the turnover of your business making it difficult for small businesses to access this kind of finance; without the assets to borrow against, these companies simply can’t take access finance from a traditional bank.

These loans are a good way for growing businesses to pay off capital expenditures at lower rates. However, they aren’t suitable for every purpose and are certainly not the only way to borrow against your business.

Business bridging loans

When you need to access money quickly, the slow pace that banks work at can be a nightmare. A bridging loan can be a great way to speed up the process, allowing you to access the money you need within a week (or sometimes less), rather than the much longer timescale of banks. Bridging loans are similar to a traditional bank loan in that they’re secured against assets, though these lenders are often more flexible on the assets they’ll accept as security. It may be possible to use a “second charge” against an asset that’s already mortgaged, enabling smaller businesses to access bridging finance.

As the name implies, a bridging loan isn’t intended as a long-term financial product. These loans are great for making quick capital investments, but your business will need to repay the loan fairly shortly - usually within a few months. This means you need to be very certain that you’ll be able to pay the money back on time. It’s a good idea to speak with a specialist advisor before agreeing to a bridging loan, to be sure it’s right for your situation.

Invoice factoring

Waiting on customers to pay their invoices can be frustrating. If speeding up invoice payments could bring you benefits, then invoice factoring might be a good way to improve cash flow. This works by inserting a factoring lender as a middleman between you and your clients. When you issue an invoice to your customer, the lender immediately pays you most of its value, say 75%. When your customer eventually makes their payment, the lender will transfer you the remainder of your money (minus a fee for their services). You’ll get less money at the end of the day, but it can be well worth it to inject cash into your business quickly.

Peer-to-peer borrowing

This is a relatively modern form of finance that’s really starting to come of age. Rather than going to a bank or a broker, you can apply to one of a number of different lending platforms. Your loan proposal will be checked professionally, then listed on a public site. Users can then choose to invest in your company. If you’re successful you’ll get all the money you need, and you have a lot of control over what you’re offering. You’re in charge, so you can choose what assets to offer as security (if any at all), and what rate you’re willing to accept.

This is a particularly good option for small businesses and startups, because each investor only contributes a small portion of your loan and investors are much happier to invest small sums of money in a risky new business, so you may well find it easier to get the money you need from peer-to-peer finance.

Finding the right option for your business

Every company is different, which means there is no right way to finance your business. It all depends on your particular circumstances and objectives. It’s important to bear in mind that there are nearly as many people looking to lend money as there are looking to borrow it. If you’re struggling to find a solution that works for you, keep looking; there are so many options that there’s bound to be something right for you. A specialist advisor can be an excellent person to speak with, too, since they can provide detailed insight that suits your circumstances.

Talk to our bridging finance experts.
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