Start Up Loan and Financing

[Mattd73]

Hi,

I am in the process of writing a business plan and need some advice! Already!

Obviously as a start up I am looking to have some funding and am looking at the banks for this.
I am looking at £20,000 at a maximum, unsecured, with approx £11,000 of my own 'money'.
Unfortunately I am one of a 'handful' of people who have substantial personal loans and an amount of credit cards.
I do still however have a fair credit rating, and have never missed/defaulted a payment.
I have looked at figures, and after about six to eight months the business will be turning over and covering all costs. (hopefully).
My concern at the moment is that I am going to get turned down straight away by the banks as a risk and will be wasting their time with a business plan.
Any advice would be gratefully recieved.

Thanks,

Matt

[Ian J]

I am looking at £20,000 at a maximum, unsecured, with approx £11,000 of my own 'money'.


I answered this question a couple of days ago on a different forum where initially you didn't mention the £11,000 of your own money" and when you eventually did, you said that it was the remaining balances on credit cards that you had available to you.

The banks will ask you where you are finding your own investment from and if you tell them that it's from your credit cards they will work out how that will affect your monthly outgoings. If you don't tell them their searches will show that you have this sum available on credit cards and they may well ask why you don't use that so you are caught between a rock and a hard place.

As I said elsewhere, in this economic climate the banks aren't really lending those sorts of sums unsecured anyway

[Mattd73]

Ian,

Thanks for your time and advice (twice).
Here is a reply you may have read on the other forum.

Hi Guys,
Thanks for all the advice, from what I have been told on this and other forums, is to basically crawl, walk and run!
The plan has taken a complete direction change, and it looks like I will spend a couple of grand on a piece of kit I need at the moment, use spare time and the mother in laws garage, (she will be pleased), carry on working, in the next few months re evaluate, maybe start working part time, so on and so forth.
Again, thanks for your time and advice
Matt

[davek17]

Hi Matt

I'll add in here that it is highly unlikely that you will get loaned anything from the bank without security and without a personal check.

If you can;t get a loan then look for more innovative ways to get what you need, it will make you a better company in the long run.

[nachman99]

In terms of whether or not you are wasting your time , a business plan is an ideal way to focus your thoughts and if you turn to another source to brdige the gap they'll want to see a business plan

I do have concerns that you will be undercapitalised and relying on too much debt , especially of the credit card variety

[Business News]

Funding cash flow from short term credit loans (such as credit cards) is a big no no. Few companies exceed 10% of turnover as an operating profit so paying 17%+ on a credit card doesn't take a genius to work out that it's not going to work out.

Most lending institutions prefer to express loan repayments as a ratio to turnover as ameans to make it look 'affordable' but in reality £1 of interest payment hits straight to the bottom line at the rate of 100%, with £1 less profit. Though loans can be offset against tax if incorporated into the business but that wouldn't apply to your personal credit card capitalisation.

[kickstartbtm]

Funding cash flow from short term credit loans (such as credit cards) is a big no no. Few companies exceed 10% of turnover as an operating profit so paying 17%+ on a credit card doesn't take a genius to work out that it's not going to work out.

Most lending institutions prefer to express loan repayments as a ratio to turnover as ameans to make it look 'affordable' but in reality £1 of interest payment hits straight to the bottom line at the rate of 100%, with £1 less profit. Though loans can be offset against tax if incorporated into the business but that wouldn't apply to your personal credit card capitalisation.

I have absolutely no idea what you are talking about. Do you?

I have been in business finance for 25 years and have never expressed a loan repayment as a percentage of turnover. Neither has anyone else I know.

I would suggest that quite a lot of companies exceed 10% of turnover as operating profit.

You might be surprised to learn that loan companies don't like bad debt so are not likely to persuade you take out a loan you clearly can't afford, particularly in the current climate where the real challenge is finding someone willing to lend.

The concept of 'expensive' or 'cheap' is always relative to needs and circumstances, hence a payday loan at 4,000% can actually work out cheaper than a bank loan at 10% in certain situations.

Working our whether a facility will work for you is relatively simple, though is generally clouded by over-optimistic forecasting. Get laid out clearly exactly what the costs of borrowing will be (in terms of both installments and overall repayments) and assess the value against ROI or savings.

Any reputable lender or broker will provide the information you need.

[Business News]

I have been in business finance for 25 years and have never expressed a loan repayment as a percentage of turnover. Neither has anyone else I know.

I have had factoring loan costs expressed as a small percentage of turnover to make the loan look more affordable. Maybe you don't deal in factoring?

I would suggest that quite a lot of companies exceed 10% of turnover as operating profit.

How many FTSE 250 companies can you list that earn over 10% operating, pre tax, profit? Maybe you are referring to small private businesses where it is tax advantagous for owners to take earnings as dividend payments rather than payroll so inflating the reported profits?

The concept of 'expensive' or 'cheap' is always relative to needs and circumstances, hence a payday loan at 4,000% can actually work out cheaper than a bank loan at 10% in certain situations.

Always good for that one day you need to fill up the parking meter, second day you could have bought the car park.

[Ian J]

I have had factoring loan costs expressed as a small percentage of turnover to make the loan look more affordable. Maybe you don't deal in factoring?


Well I do and the "loan costs" are expressed in the same way as any other loan. I think that you may be confusing "loan costs" with the factoring commission which is payable for the service element of factoring and is charged as a percentage of turnover

[kickstartbtm]

I have had factoring loan costs expressed as a small percentage of turnover to make the loan look more affordable. Maybe you don't deal in factoring?

We use a consultant - who has just provided the same reply as Ianj. Overall, I would avoid any provider or broker who won't give absolute costs based on specific data.

How many FTSE 250 companies can you list that earn over 10% operating, pre tax, profit? Maybe you are referring to small private businesses where it is tax advantagous for owners to take earnings as dividend payments rather than payroll so inflating the reported profits?

Not my market, nor likely to be relevant to this thread. Many of my customers have operating profits well in excess of 10% whilst others have operating losses. They are able to quantify and justify borrowing costs because they understand ROI.


Always good for that one day you need to fill up the parking meter, second day you could have bought the car park.

Still no idea what you're on about, but must say that trying to define something a 'cheap' or expensive with no knowledge of circumstances or application is utterly pointless.



Finally, many successful business have been founded on the back of credit cards or 'inappropriate' borrowings - not least Duncan Bannatyne's.

I wouldn't universally recommend it, but if the cashflows work and your are confident enough then it might be the best option.

[nachman99]

Credit card financing of business is very high risk . In my role as a debt charity trustee I see countless cases where things have not gone to plan, even if the business is successful.

[bfme]

Hi

As a rule of thumb, you usually qualify for lending and are perceived as a creditworthy borrower when your operating cash flow is very strong and therefore when you are expected to cover debt repayment easily. As a start up, any lender is sceptical as lenders will base their assessment primarily on your historic performance.
Therfore my recommendation here will to have recourse to lending only when you want to grow and take your business to the next level meaning that you have stable cash flow generation. Until then, get the money from different sources and bootstrapping is a good alternative.

Hope this helps,
Regards

BFME

[davek17]

I wouldn't write off Credit card debt to be honest. If you have a level head, do your sums and stick to the plan then you can quickly raise money on zero % deals for over 12 months these days. I get one of these on a card offered every month and if you can take the loan on 0% over 12 months then the fee of 3-5% to set up the deal works out at a good rate to be honest.

Business is about taking calculated risks and for some this can be the difference between starting up and not. In my view whats the difference in having a £20K loan from the bank and doing this? You have to pay both back in the end and the bank will get your home before a credit card will.

The only thing to watch for on credit cards is the obvious stuff, interest you will pay if you go over or break the minimum payment in some way. 15-19%APR is typical so they should only be used short term and going over this will crucify you.

You will not get a loan without putting up personal security. Even after 4 or 5 years of good trading banks are still asking for personal security on loans. We want to get a loan to match an innovation grant here but despite only asking for £70K on a healthy business the partners still have to put up collateral. yes it is a way that banks are squeezing more money out of through more and more setup charges but its the reality.

If you have a great idea, why not put it up on a funding website like Kickstarter? There are UK based ones too.

[kickstartbtm]

I appreciate that this is an old thread, but just to add comment on credit cards (or any type of borrowing really), the killer is unlikely to be the APR as much as repayment terms.

Many credit cards look for payment of as much as 5% of balance per month, which can make for some pretty bad cashflow - particularly if your business isn't likely to be cash generative for some time.

If you are anticipating good cash inflow, even full rate cards can be a very viable way to start a business.

[davek17]

A good point, and you should calculate this in to the amount being borrowed.

In my experience though the minimum payments have been nothing like this. Best to check first!

[Steve Thornbury]

You need to speak to Rob Warlow.

[bizloanservices]

There are pros and cons of using credit cards to finance a business which have been highlighted. I recall a recent survey which revealed that in the region of 40-50% of small business owners are using CCs to finance short-term cashflow problems.

And there in lies the distinction - short-term.

In this case the CC will be used as quasi start up capital thereby resulting in a start up funded 100% by debt. Firstly, no bank would support this anyway but even if it could be obtained, starting off a business in this financial position is a huge risk.

Of course there will always be exceptions to the rules and the nature of the business/cash producing capacity is not known here but as a general principle, no.

[internetspaceships]

I know quite a few people who had no option but to set their company up using credit cards.

I did it myself if the truth be known. It works if you can take into account the pitfall that arises from the horrendous interest rates that you get charged.

Lending from banks for setting up businesses is extremely tough to get these days without putting your life on the line and offering the blood of your first born child as an offering.

Do write a business plan, and do be extremely realistic in it. Don't assume that just because you have a plan, that it's going to follow that track because it's not likely to.

[DDPlumbing]

I just tried to borrow £25k unsecured from natwest, While putting in £30k myself, business 5 years old, so its for expansion.

No way would they do unsecured :(

So I'm drawing back overpayment on mortgage instead.

[nachman99]

I suppose that's what overpayments are for - a rainy day

It's worth checking with your lender on any smallprint etc as one never knows !

Also check what it will do to monthly payments esp for any rate rise that may be coming