In the main businesses and sole traders can borrow money using similar channels to members of the general public.
However there are some quirks in terms of criteria and perhaps more importantly the lenders who are willing to lend where the whole purpose of the loan is for business. The actual reason behind business loans vary dramatically but most can be grouped into certain main scenarios per below:
Borrowing for starting a business or to help support a business in need of money.
Stuart Johnson, Marketing director at First Choice Finance believes; `Business start-up by its nature means there is not proven history on record to show that the business will work. If you are entering a well-known arena, or perhaps taking on a franchise, then lenders may look at past performance of the same genre. In almost all cases you will need to provide the dreaded business plan`.
This must detail all your costs such as plant, machinery, tools, IT, overhead etc alongside target client base, your marketing plan and anticipated income and very importantly profit. The government offers some incentives to help people start businesses and your local chamber of commerce may be a good start to get a feel for what help, financial and otherwise may be available for your chosen path.
“Business short of money“ is a tricky area. If the business can evidence that the problem is a cash flow matter and there are orders pending on the books that are clearly going to turn matters around in the short to medium term, then there may well be help available. Contact your business bank account manager and arrange a meeting taking evidence with you that the issue will resolve in time – they already know about your business finance and will want to try and keep you going. Also you can approach specialist business support lenders.
These can be found easily enough on line and are too varied to mention here. However a couple of things to watch out for, firstly rates may not be as low as those advertised for your scenario so check any agreement carefully. Secondly as you may be seen to offer a degree of risk to the company funding you they may seek security from assets.
These may well be the assets that the company already owns such as machinery or buildings. If the business cannot offer suitable security for the money and the lender requires it then you may well have to provide what is termed a “personal guarantee“. In short this means that if you default on the loan you / your co-owners will be personally liable for repaying the debt back to the lenders.
If you do not have the funds / cannot agree a payment plan then the next option would be for the lender to take security over your own assets, such as your home, to ensure they ultimately get their money back. In these cases it is wise to consider taking legal advice before you sign up.
Money to invest to enable your business to grow.
It is very hard work to make your business profitable and keep it solvent. Once this is a steady state though the question may well be… “how to I get to the next level?“. Businesses cover a huge range of sectors therefore the limiting factor in terms of resource can vary massively.
If your business is heavy on human resources, perhaps a call centre driven operation then you may need money to invest in better telecommunications / computer software or simply need more skilled people to make those calls. On the other side you may be into specialist machining of components or supply of certain items to a business supply chain.
This can be in areas such as automotive, engineering or printing / packaging. These sectors use some very specialised and expensive plant / equipment to manufacture their wares.
The good news here is there are lots of lenders willing to consider investing in a profitable business to help it grow. Again your bank may be a good start, or other mainstream lenders that operate in the business sector.
If these are too expensive or cannot help and specialist lenders are not what you need, other options include: private equity funding ; where they lend the business money for a stake in the same and merging ; where you combine forces with another company who has the equipment you want and have capacity, whilst your business would also reinforce the merging parties offering.
Basically a limited business is usually seen as an entity in its own right. The company will have its own registration number, be registered with companies house and of course the ever present HMRC, the tax office. The directors and owners of the business make decisions on behalf of the business and are in effect the controlling individual, the aim being to help the company perform well, pay its own way and behave in a legal manner.
So what happens when things go wrong?
In case of breaking credit agreements, breaking rules set by legislators, the government or regulators the business is the first point of call. For example You will have heard about businesses being fined for breaking rules etc. Likewise creditors to the business can pursue monies owed to them by your company through the courts, as can clients who you have failed to deliver too etc. If this action is taken and your company subsequently loses the action in a county court the company will have a County Court Judgement registered against it.
This will show against the company for circa 6 years, but may have less of a negative impact if the business settles it as it should then show as a satisfied ccj. Thereby at least demonstrating that the company did at least settle the bill. Other lenders and companies can see when a company has incurred CCJ`s the amount and when.
Clearly the impact here can be pretty severe. Should you need to borrow to invest in your business, or seek fresh investment through new shareholders, having CCJ`s against the business may be a red flag to any such investors. Occasionally the damage may not stop there.
In certain scenarios, where the Directors controlling the company have been negligent in their actions, further action may be taken against the individuals concerned. This may result in a judgement against them in their own name which will affect their personal access to finance and certain job roles. They can also incur a disqualification from being a company director in the future for certain industries or at all.
Is the impact of a CCJ different if you are a sole trader.
There are other types of business but the limited company and sole trader set ups are the most common types. There are some key differences between the sole trader and limited company operations, which have various impacts – but for the purposes of this article the concept of ownership of the actions / liabilities is a major one. In short the sole trader is in him/her/their selves the company.
Importantly Debts taken out or accrued are the liability of the sole trading person to ensure repayment. So if you have a debt that cannot be repaid when due then the creditor may opt to take you to court to recover their monies from you, or even your assets.
Which creditors can take a business to court?
The creditors that can do this are not just limited to your bank, loan providers or commercial creditors, HMRC and Customs and excise also have the right to pursue monies due directly from the sole trading personnel. This can lead to one or more CCJ`s being registered against the individual. These will show on your personal credit profile for up to 6 years.
Any creditor who you give authority to carry out a credit search can see the CCJ, the amount it was for, when it was incurred and whether or not you have paid it (termed satisfied). Unfortunately this can have a negative impact on your credit score and rating. The bigger the CCJ, the newer it is and whether it has been satisfied or not vary how much of a negative it will be.
Satisfying it will help with the reparation process. In terms of age after 6 years it should drop of your credit file and therefore not be visible to potential new creditors. Having a CCJ on your credit file can impact on whether you can obtain a mortgage, higher purchase, loan, credit card or even buy now pay later deals.
Having good business insurance and a solid solicitor behind you may help to curb these matters before they develop into a CCJ.