One size does not fit all: Six questions to ask when securing business finance

United Kapital MD Tony Pegg tackles the issue of business finance and gives his advice on the sage questions which must be addressed.

When you consider all the possible variables – size, market share, working capital, running costs and more – it’s obvious that no two businesses are exactly the same.

Every small business owner has a unique set of circumstances and specific requirements to consider before making decisions that are right for their business. It’s no surprise, then, that when it comes to business financing, there’s no one magic solution that will suit every company’s needs. Rather, business owners should ask themselves the right kind of questions in order to secure the right kind of finance. Here are the main ones to consider.

1. What kind of financing is available?

Despite the range of lending options available, it’s surprising how many small business owners still consider securing a traditional bank loan a potential make-or-break for their business.

However, there many alternatives to bank loans, including merchant cash advances and other factoring loans, equity financing, peer-to-peer lending and other forms of crowdsourcing, equipment loans, borrowing from friends and family, and more. Business owners should research all the options before making a decision on the best financing for their company.

2. What terms are available?

Bank loans traditionally offer longer repayment terms than alternative lenders, who tend to specialise in short and mid-term loans. While the Annual Percentage Rate (APR) used by a bank to calculate the repayment may itself be low, it’s important to remember that borrowers will be making repayments for much longer, meaning they may end up paying double or even more of the original loan amount. In contrast, short term loans such as merchant cash advances have higher rates but are intended to be repaid in a matter of months, not years.

3. What are the underwriting requirements for the loan?

Due to their stricter lending criteria, most banks require substantial collateral to secure any funds they advance to a small business. For start-ups or early-stage companies without sufficient company assets, revenue or a long business history, providing such security can be a major stumbling block.

Many entrepreneurs get around this by using their personal assets – such as their home or savings – to secure a loan. However, this is a big gamble as they may lose everything in the event that their business fails. Business owners who do not want to risk so much should consider alternative lenders who do not require collateral to secure a loan.

4. What kind of credit score is required?

Like collateral, securing a long-term loan usually requires a minimum credit score – both business and personal – and this is often hard for young entrepreneurs to achieve. Alternative lenders typically don’t require a minimum credit score in order to advance money so they may be more suitable in such circumstances. Indeed, many small businesses begin by accessing a short-term advance from an alternative lender and then progress to a traditional bank loan later.

When the bank comes to assess the creditworthiness of the applicant, they will be able to demonstrate a proven ability to access and repay a loan. In this sense, borrowing wisely can help to boost your credit score and secure access to further credit in the future.

5. How quickly can the money be accessed?

One of the biggest advantages of alternative financing is the ability to access cash quickly – sometimes only a few days after making an initial application. Bank loans, in contrast, generally require a lot of supporting paperwork and can take weeks or months to process.

For businesses in need of fast cash to cover a crucial payment or to take advantage of a limited business opportunity, that’s a long time to wait, particularly if there is no guarantee of success at the end of it. Even businesses that do qualify for a low-interest term loan may use alternative financing as a stop-gap solution to meet an urgent need. Paying a few months of higher interest rates will almost certainly be worthwhile for businesses that need extra funds without delay. However, for businesses that can wait, a longer-term loan may be more suitable.

6. Can I make the necessary repayments?

All loans, whether long term or short term, have to be repaid on time or the borrower risks defaulting with potentially disastrous consequences. Because short-term loans have higher associated rates, it’s particularly important for any business to calculate whether or not it can afford to make the repayments while continuing to operate as normal.

Businesses worried about their cashflow in such circumstances might want to consider equity financing or other forms of investment that do not require repayment. For new start-ups, bootstrapping and reinvesting profits may be the safest way to grow in the initial stage.

One size certainly doesn’t fit all when it comes to financing. If you’re considering borrowing for your business, work through your current and projected figures carefully before making any application to ensure you can make repayments. In addition, study all the financing options available before you commit yourself to any one solution.

Hunter Ruthven

Hunter Ruthven

Hunter was the Editor for from 2012 to 2014, before moving on to Caspian Media Ltd to be Editor of Real Business.