How do I borrow money for my business?

MDUK

Originally posted in 'Loans'

advice needed please.

we have an opportuniyt to grow my wifes business - i need about £10k right now and my forecasts show i will be £5-6k overdrawn my month 5. my forecast shows it is up hill after that i will be in very slight profit by month 12. This is tracking real figures based on existing similar businesses so shoudl be acheivable.

i want to put the money in the business as a directors loan £15k (as i beleive i can get a better rate this way - borrow it over 5 years - aim to pay it back in 3) i applied to northern rock at 6.2% with no early redemption penalty but have been turned down. That really suprised me - don't have huge debt, a viable business for my wife and i am employed. but it is a good rate and i guess they can choose to be picky.

So i need to find another lender - i wondered whether i should pay for a credit check on myself to see if i can identify why we were turned down, rectify it and apply with someone else.

We are currently £5k overdrawn in the business but have that in debtors and should get that in in the next few weeks. The business currently owes us £14k in directors loans (which i am not in a rush to get back - i can wait until the business is able to pay us back)

The bank have agreed to increase our existing overdraft to 10k - maybe more(they obvioulsy have the last 10 years trading figures) so i could do it on that and a smaller personal loan but i think this is an expensive way of doing it. i want to pay the debt off in 3 years and if we can do it earlier by not taking a higher salary we will.

i am wondering whether to ask the bank for a business loan rather than a higher overdraft but this is likely to be around 8.7% which seems high.

Any advice on how to go about this would be appreciated.

The reason for going for this is if we can make it work, we are 3 years from a good income and a sustainable business as opposed to a very average income and 'just a job'.

thanks for taking the time to read this.

M

inmypocketnottheirs

I always consider that for business purposes where it is cash flow that needs funding an overdraft is best. Alternatively if you are invoicing customers for goods or services that are businesses, and their payments are generally received within 90 days, why not consider factoring.

I use a factoring company myself, and if your require their details pm me and I will gladly put you in touch.

Mark7799

I would agree that the overdraft or factoring seems the best way. Surely the overdraft would give you more flexibility than the loan account? What did you tell NR you wanted the loan for? Some lenders tend to be fussy about people taking personal loans to invest in businesses without seeing the full picture of the business.

MDUK

Thanks - I told NR it was for business so i guess that could have had a bearing. i have never been turned down for loans nor did i expect to be based on income.

i had assumed overdraft would be too expensive - that said i have done some more figures tonight and am wondering whether i should talk to the banks business manager again.

half the clients pay up front - the others are invoiced and take between 30 and 90 days to pay (90 days is one customer and 40 is probably average) due to the nature of the services the half that pay on invoice cannot be charged up front.

i don't have any experience of factoring - perhaps you could explain it please.

inmypocketnottheirs

MDUK wrote: »

i don't have any experience of factoring - perhaps you could explain it please.

Basically factoring is where you invoice your customers in the usual way. You stamp or print a statement on the invoice to the effect of 'This invoice is now assigned to ABC Limited. The only way to discharge this account is by making payment direct to ABC Limited, address, bank details etc.'

You then send, fax, email your invoices on a daily, weekly, monthly basis to the factoring company and they then advance you typically 75-80% of the total (including VAT).

Factoring is secured on your book debts, meaning that the Factoring Company has first claim on your customers money. If a customer does not pay, then the amount owing is deducted from your advances. Factoring is not a way of insuring your customers but many Factoring Companies will offer to insure your customers for a premium.

Factoring is particularly good for growing companies who have good customers who pay their bills. It means that cash flow problems are resolved, and unlike loans or overdrafts you do not run out of money. With say a £10k loan or overdraft, once the funds are used up it is not (generally) possible to go back and ask for more money. When using factoring, you just keep sending your invoices and you keep getting your money.

PM me if you want to chat about this.

HTH

MDUK

i have put some on credit card at 1.24% interest and built in repayments into my forecast to clear that within the year. I have extended my overdraft to give me a buffer. if i track my forecast i will be in and out of the black for 13 months then should sart getting into profit and shouldn't need the overdraft.