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Money expert Gary Hemming from ABC Finance with some top tips on what to do if you want to launch your own project and need cash.
Flexible working that fits around your home and family life isn’t always easy to come by. With this in mind, many working dads choose to become their own boss, by either starting or buying a business.
This can seem like a pipe dream for the thousands who don’t have a giant pot of savings to fall back on, but in this article, we will break down exactly how it can be done, the benefits of using finance when going into business and exactly what you need to supply to qualify for funding.
The most obvious benefit is that using a loan to get into business is that it allows you to afford a business that would otherwise be out of reach. That said, it isn’t the only benefit.
Running a successful business is all about managing cash flow and borrowing money to increase your cash reserves can really help with this. Starting off with cash in the bank can relieve a lot of pressure and allow you to make decisions clearly without worrying about where the next month’s money will come from.
This will lead to better decisions, give you the freedom to invest in marketing tools, stock and equipment that could lead to increased profits further down the line.
When buying a business, your lender will focus on several factors. They are:
While the lender will require a set list of documents, there are still ways of influencing things to make sure your application has the best chance of success.
The first step is to dig deep into the accounts. Look beyond the turnover and net profit to understand the real profitability of the business. If the previous owner spent £5,000 on new equipment or other one-off expenses, you may be able to put those costs back into the profit for the purposes of your application. These costs are known as addbacks.
Other common addbacks include costs due to COVID, one-off costs for projects, depreciation and amortisation.
These addbacks can significantly increase the business’ borrowing power and can be the difference between success and failure.
Starting a business represents a very different kind of challenge as there is no previous financial performance for a lender to base their lending decision on. This makes lending to start-up businesses very tricky for all but a few lenders – but worry not as there are some options out there!
The first is actually a government-backed lender who is aptly named Start-Up Loans. They are keen to support budding entrepreneurs, but still have plenty of hoops to jump through. We will cover the best way to do that shortly.
The second option is to take a secured business loan, or secured loan. These loans are only available to homeowners and involve the lender taking a legal charge over your property, usually one that sits alongside, or behind your mortgage.
By offering security to the lender, you’ll find many more lenders who are willing to lend as they are protected should your business fail. This of course means that your property may be at risk, so it’s important that you are fully aware of the risks when taking this route.
Finally, we’ll take a look at what a lender will require and how we can jump through the inevitable hoops when applying for a loan for your start-up business. The main documents are:
Follow these tips to increase your chances of success: