Start up business HELP!!! Capital, overdraft, banks, defaults

rafiduck

I have just registered a ltd company and we are looking to launch it in May. I have two personal defaults on my credit file that are due to come off in April. Will the time between April and May be long enough for the bank to access my credit file in a positive way? We will be looking at a £30,000 overdraft but have no security or capital this will come from my fianc! who will take out a £10,000-£15,000 personal loan. Is that ok? will the bank look at the source? The business overdraft will be in my name initially but the £10,000-£15,000 will come from that source. What is the minimum amount of capital the bank will ask for? Lloyds tsb for example. Is it 10%? The branding and website costs come in at £10,000 so were trying to work out the best thing to do. If we spent £10,000 on branding and marketing and showed this to the bank would they consider that as capital? We are both named as directors, can she take out a personal loan and then a business loan elsewhere, if that is the case then we would look at starting something sooner due to my defaults. Can I open a business account prior to the overdraft with my two defaults? Any help and honest experienced advice would be great. Thanks.

Savvy_Sue

Welcome. You said 'honest advice', so while I'm not particularly experienced, here's my take ...

rafiduck wrote: »

I have two personal defaults on my credit file that are due to come off in April. Will the time between April and May be long enough for the bank to access my credit file in a positive way?

Not sure - how large were the defaults? And what are we talking about, missed payments made up later, or something more serious?

rafiduck wrote: »

We will be looking at a £30,000 overdraft but have no security or capital this will come from my fianc! who will take out a £10,000-£15,000 personal loan. Is that ok? will the bank look at the source? The business overdraft will be in my name initially but the £10,000-£15,000 will come from that source.

That seems like a heck of a lot of money for an unsecured overdraft, and I'd be surprised if you'd get that much on a new business.

rafiduck wrote: »

What is the minimum amount of capital the bank will ask for? Lloyds tsb for example. Is it 10%?

I think much higher: look at previous threads on the subject of finance for a new business and see what others say.

rafiduck wrote: »

The branding and website costs come in at £10,000 so were trying to work out the best thing to do.

Best thing to do? Honestly? Scale back your spending, drastically.

rafiduck wrote: »

If we spent £10,000 on branding and marketing and showed this to the bank would they consider that as capital?

Err ... I can't see how! My (admittedly simple) understanding is that capital is money you have available to spend: once you've spent it, it's no longer capital! I can't see how it could be used, tbh: it's not as if you could sell the branding and marketing (or even the website) to recoup your costs if it all went belly up.

rafiduck wrote: »

We are both named as directors, can she take out a personal loan and then a business loan elsewhere, if that is the case then we would look at starting something sooner due to my defaults.

She can try, but again I'd be surprised if any bank would give a business loan to a new business / director of a new business without requiring a personal guarantee / security (eg secured against a property you own).

rafiduck wrote: »

Can I open a business account prior to the overdraft with my two defaults?

Only way to know is to try. I suspect the answer will depend on the answer to my first question, and each bank may have its own policies.

So, onward to 'what to do' - apart from scaling back on your plans. Look at other sources of finance: family? but make sure they afford to lose whatever they lend, or give them a stake in the business. If you're both under 25, look at The Prince's Trust, you MAY get some help from them, but more importantly you'll get some good advice and support. If you're both currently working, delay the start while you live absolutely as frugally as possible, make it a challenge to see how much you can save in 6 months. If you're renting a property, see if you can move somewhere cheaper and ditto.

and please tell me you've done a 'worst case' cashflow projection as well as a 'it'll take off in a big way from day one and we'll both be millionaires in six months' projection - because hopefully the truth will be somewhere in between, but you need to know what options you've got if it's closer to 'worst case' than 'millionaires'.

chalkie99

I have just registered a ltd company

The business overdraft will be in my name initially

:huh: A limited company is an entity in it's own right. The company would have the overdraft and you would need to sign a personal guarantee to cover it. For this you will need security which you state you don't have.

Both yourself and your fiance will be credit checked when opening the account and the bank will see that she has a loan.

If you spend £10,000 on branding and marketing then that money is gone. you have no asset which the bank could use to reclaim their debt.

Frankly, I can't see you getting a £30 overdraft, let alone £30,000 and unless you review your plans completely you probably won't even get an account.

worried48

Here's what I posted on the loans board - I haven't dropped in here before

We have been in business for ten years. We have an overdraft of £3000 and every single year the bank expects us to put in a full financial statement, including all our personal expenses, just to keep this overdraft. We have never gone over the limit, except accidentally for about one day, and have never missed a loan payment and neither has my husband missed a payment on his credit card (the business finance is all in his name). A year ago our overdraft was £5000 but the bank decided they didn't like that because it was not going into credit every month so they reduced the overdraft by £166 a month over the year which caused us difficulty and our personal debts built up. We were saved from serious problems only because we had a PPI complaint upheld.

When we first approached the bank we did not even ask for a loan, they gave us a loan to consolidate existing borrowing, but that was ten years ago. They gave us another in 2008 which we are still paying off. But my husband's credit rating (as they told him at the time) was 3 out of 5. Yours will be lower than that - mine is at 1 and I have never defaulted.

So, sorry to be a wet blanket, but I would not be very optimistic about your chances of getting this sort of finance when you haven't even started yet.

10k on branding and marketing including a website sounds very high to me but then I don't know the business you are thinking of. I can tell you that our advertising costs are zero (the few times we tried advertising we found we had zero response to it!) and that our website costs are something nearer to £100 per year than £10,000. We have a very high place on google now and at least 50% of our business comes from personal recommendation. But to start with, we sold on ebay, and it was a slow start. Despite all this, our turnover during the recession has fallen a lot.

Pennywise

Even with a good credit history, you'd be very unlikely to get a bank to lend £30k on loan or overdraft without security,i.e. a second charge over bricks & mortar or a personal guarantee backed by someone with equity in bricks & mortar. With a poor credit history, you'd be lucky to get any overdraft at all, let alone that kind of amount.

At the moment, the limit for unsecured borrowings from banks is more of the £5-£10k range.

Even if you're using the loan to buy bricks and mortar, the bank will want 25% deposit and a robust business plan proving the repayments can easily be met - and that's despite them having security of the property.

As said above, rethink your plans as this is very unlikely to get off the ground.

What are you using the money for? If it's to buy a vehicle or equipment, you could get it on lease or HP instead. If it's to buy stock, then you need to negotiate longer credit terms or sale or return from the suppliers.

Please tell me that you've got plenty of personal reserves and won't need to draw money out of the business for personal living until it's profitable and producing positive cash flows. No bank or lender will lend you money to spend on yourself, i.e. draw wages before it's proved profitability.

Lomast

Tend to agree with the above we have been trading 30 years and the bank still insisted on personal security on a 30k Loan for us.

Also our bank (HSBC) are quite specific on that they will provide overdrafts for cash flow and short term flexible finance they much prefer us to take a loan if its not cash flow or very short term borrowing

rafiduck

Thank you to everyone for their amazing advice and taking the time out to answer all of the questions. Its very much appreciated.

Despite my natural optimism towards everything in life we are also realists and hard workers, so the advice given will be taken on board.

My personal defaults are due off in April and are marked as settled for figures of £50 and £250. When will this follow through to the banks does it take a few months after they have cleared?

We have a business plan and both worst-case and best case cash forecasts. The monthly outgoings are £2700 which are mostly made up of advertising costs, these advertising costs need to be covered for at least 6 months until payments start coming in worst case. The remaining monies will be start up costs so have been quoted £3600 for logo design, advertising templates and lots of other bits and pieces we've managed to get this reduced to £2400 and this is from a reputable graphic design company. The branding, website and marketing are so important to win business. £5000 for a professional website (which I think we'll have to re evaluate). and then software installation costs. We could potentially pay for some of the branding and the website costs by May at a figure of £5000 we had spoken to somebody at Lloyds TSB yesterday afternoon albeit briefly who mentioned that we would need at least 10%. We would only need a £20,000 overdraft as £30k was making sure we had more than enough.
My fianc! gets a bonus in June of £2000 and could then save a further £2000 between May to July and then apply for an overdraft this all depends on the lending criteria of Lloyds TSB.

Just to add.....The reason for deciding upon an overdraft is due to the nature of the business and by month 12 it should have almost have been paid back bar £1000

Does this sound more promising and doable.

worried48

No, it sounds like a huge gamble. You haven't given any indicator of the area of business. Our website is totally home done and, astonishingly, many customers comment on how much they like it - it is so obviously not a professionally done site that it gives customers the message that we are real people. At least after years of such comments that is the only conclusion we can reach.

£2700 advertising costs? What if the profits over the first few months don't even cover the advertising costs? Without knowing what sort of business it is, it's a bit difficult to say much. Is repeat custom going to be a factor? Is personal recommendation likely to be a factor? Is it the sort of product people only buy once? Or what? Will you need premises? Vehicle? Specialist equipment? What?

rafiduck

Online estate agency.

Would it be possible to see your website?

worried48

I'll PM you the link - have posted quite a lot of personal stuff round these forums so don't want to say openly who I am. But I don't think our website approach would work for the sort of business you are looking at. And I can see the problem of course, you've got to get a lot of people listing houses with you and to do that you've got to be very visible.

I wish you luck but it does not sound like an easy task.

gb12345

rafiduck wrote: »

The remaining monies will be start up costs so have been quoted £3600 for logo design, advertising templates and lots of other bits and pieces we've managed to get this reduced to £2400 and this is from a reputable graphic design company. The branding, website and marketing are so important to win business. £5000 for a professional website (which I think we'll have to re evaluate).

Take a look on Freelancer.com - there are a number of very professional graphic and web designers on there who will do the job for a fraction of what you are being quoted.