One of the significant doom and gloom statistics reported in the news is that banks are lending less and, in particular, are lending less to smaller businesses.
I checked some of the figures out at the Bank of England’s website, and they say that banks have lent 4% less money this year than they did last year.
But then I thought, hold on a minute, that’s 4% less than last year – 4% isn’t that much, is it? And then I delved a little deeper into the Bank of England figures, to find that they think that banks are lending, albeit less than a few years ago, and that although they say the availability of credit for small businesses is “variable”, the banks are lending to some small businesses.
Which fits with what I see with the companies I’m working with – there is money available, but the banks are being very selective about who they lend to. So much for the doom and gloom: how do we get some of that bank finance into your business?
You have two options here. You can either borrow personally and put that into the business, or you can get the business to borrow the money directly.
When and why is personal borrowing a good idea?
You might want to borrow the money yourself if you can get a better interest rate through remortgaging your house. Mortgage rates are 2-4%, whereas business loans are 9-12.5%. However, remortgaging is a hassle, so this is only worthwhile if you need upwards of 10k.
Even a personal loan (rather than a mortgage) will often be less time consuming and at a better interest rate than a commercial loan to the business.
If you need less than 10k, say to pay for some business advice, a rebrand and a new website, you’d probably be better off getting a 0% credit card, and making sure that you pay it off before the 0% bit turns into 26%.
Remember that if you borrow personally, you’ll have to pay it back yourself if anything goes wrong, so you’re taking the liability yourself, not the business.
Getting the company to borrow the money
If you want to limit the potential liability to yourself, or if you don’t have enough equity in your house to remortgage, and you need more than 10k for the business, you’ll probably want to get the business to borrow the money.
I’m assuming that you’re a limited company here, by the way – if you’re a sole trader or a partnership and you borrow the money, it’s the same as borrowing the money yourself. In this case, you’ll want a commercial loan.
Here are some tips to help you get the bank to lend you money:
- Banks like you if you’ve been going for a few years, and you have been producing profits for a while. Their rule of thumb is that they’ll lend you three times your net profit, plus the director’s drawings.
- Banks will want to see a good (but brief) business plan, with a clear focus on how you’ll be able to pay back the money you want to borrow. Remember that the banks want to lend you money, as long as they are confident that they’ll get it back because that’s how they make their giant profits.
- Do be prepared to offer a personal guarantee. They’ll ask for it, and if they don’t ask at the beginning, they’ll sneak it in later.
- Banks will also ask you for security. Remember, they want to be certain that they’ll get their money back, so they’ll ask you to back it with a second charge on your house. Providing security makes it more likely that you’ll get the loan, but you have to think carefully about the increased risk to you.
- If you can get someone else to put some money in, or you can put some in yourself, this will make the bank more likely to lend to you.
- Banks prefer it if you’re buying things. They would prefer you to borrow to buy a new truck than a website, even if the website is going to generate lots of new business for you. Old fashioned and ludicrous, but that’s the way it works.
- Go to lots of banks, not just the one you have your current account with.
If you don’t have any assets for security, consider the Enterprise Finance Guarantee, where the government will guarantee 75% of the loan, which makes the banks more likely to lend to you. They’ll still ask for a personal guarantee, and EFG loans are more expensive, but it’s definitely an option.
This article is one of a series on how to get money into your business so before you run off and borrow money, check out my guide to the organic cashflow model (which I always prefer to borrowing) and subscribe to the series to make sure you get all the instalments.