Precautions for Small Business Owners While Taking out a Loan

After the economic recession began easing its grip on financial progression in the U.K. in 2013, businesses began resuming their activity in expanding. However, not long after the economy started seeing a positive growth after a hiatus of several years, the uncertainty of Britain’s membership in the European Union created new hurdles in the financial planning of large corporations. This renewed slowdown in major companies’ trade activity was not mirrored by small and to an extent, medium sized enterprises. The Banks of England has recently published a host of economic performance data in the country, which also contains information about small businesses growing at a pace that has contributed greatly in keeping the economy afloat. As a knock on effect, public spending has also been boosted and the banking sector has reported a mushroomed lending activity.

Small business have therefore, taken full advantage of the number of financing options available to them which are, in turn not much use to larger companies. These include taking out small bank loans, personal loans and in some cases, short- term loans. All these financing options play an important role in the function of a small business as the capital required by it would not be very big as opposed to a larger enterprise. This has led to an additional 84,000 small businesses being registered in 2016 alone. However, as banks and other lender have increased their willingness to provide loans to small businesses, it has become even more important for them to understand when to utilise their financing options and when to employ their own resources.

Overview of Small Businesses in the U.K

In order to establish the grounds for any loans to be accepted or not, the environment that small business operate in must be constructed. This would depict a clearer picture of when and how it is advisable for small businesses to secure a loan.

Small and Medium Business Enterprise (SME) have recently had a very favourable environment to grown. However, as more and more financers are offering attractive lending packages to SMEs, the criteria for accepting one has to be kept in focus.

In 2016, there were more than 15.7 million employed in SME businesses in the country. That is a massive 60 per cent of the total private workforce in the U.K. According to the government data, 4.2 million small companies had only one (the owner) as an employee. With a competition that large, it would be essential to remain competitive in order to turn a regular profit. However, it also opens up non- traditional business financing options.

In order to approve a loan for a small business owner, the lender would also take into consideration of their personal finances and credit history. This is because in a company this size, any change in the owner’s financial circumstances would have a profound effect on the company.

While The British Business Bank, a government body, welcomed the improved financial assistance availability to SMEs, it also cautions against their unnecessary usage. Keeping this point in view, the Money Advice Bureaux, a charity based in the U.K., has termed out a few handy pointers for small business owners to help them with their lending plans. Their advice, along with a few other opinions from financial advisors, can be summarised in several headings.

Making the Decision to take out a Loan

This point might take some thinking and would require plenty of planning. A small business owner might even be required to consult a financial advisor such as Money Advice Service (MAS). This would help the business owner to decide whether or taking out a loan is absolutely essential or whether it can be done without. Saving small amounts up over time can often provide a viable solution to an owner’s needs. However, if having a savings account would not be enough, the owner would have to gauge the importance of what they require the loan for. Whether it is a business expansion or operational expenses, the viability of the loan would have to be weighed against the importance of not having to be in debt.

Although, if the financial returns from the investment brought in by the loans is significant enough, it might be best to seek the financial help after all.

Selecting the Right Lender

This section would be of the greatest importance to a small business owner as it will be determined by the urgency of their financial need. A personal loan from a bank or another credit provider would most likely cover the amount required for a small business. However, such loans might require time to approve and more importantly, a personal credit check of the owner.

If the owner has a poor credit score they might be rejected for the loan or even be required to pay higher premiums. In such cases a short- term loan might be best suited for the purpose, if the owner is confidant in their ability to make repayments.

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