According to a recent report published by Moneywise, the average cost needed to start a small business in the UK in 2016 was estimated to be £27,520. The research further highlighted the most expensive states and neighbourhoods where the investment cost for a new business was higher than normal, with Manchester leading the way. Newcastle was ranked as the most cost-effective and promising state for small businesses.
The findings of the report were summarized via a survey which reviewed 850 small and medium-sized enterprises. About 42% of owners of these businesses had raised funding for the start-up by using their personal savings, 24% of them used family borrowing, and the remaining owners opted for a third option – loans. The interviewed business owners who opted for loans occasionally talked about the unfriendly nature of financial institutions and complained about how difficult it was to get their loans approved through them.
This lack of understanding on part of banks and difficulty in getting loans approved is one reason why business owners wish there were alternative means to raise money. Well, there is, and it has already led to a rise in lending on the whole. Before we talk in detail about it, let’s have a brief look at how lending regulations in the UK differ from that in other countries, such as the USA.
A Comparison between Loan Regulations in the UK and Other Countries
Another issue that hinders a smooth borrowing process is when potential business owners head to financial institutions and are rejected a loan due to their bad credit history. A bad credit score isn’t always the person’s deliberate fault; however, financial institutions rarely take this into account. So, if you are in the UK and have a bad credit score, the rules for borrowing that apply to you are slightly different from the ones that apply on people living in other countries, such as the USA. In the UK, there isn’t any maximum Annual Percentage Rate (APR) as well as any other strict regulations. Personal loans aren’t regulated under the FSA; so, business owners don’t have to worry about or be cautious when it comes to personal lending and its management.
Where Does a Bad Credit History Leave You?
A typical APR in the UK is significantly higher than that offered by causal street lenders, leaving business owners having a bad credit history with limited options to choose from. Options that remain debatable include:
- Logbook loans, with a usual APR of around 30%
- Doorstep loans, with a usual APR of around 200%
- Guarantor loans, with a usual APR of around 42% Unsecured loans are one of the hardest and most expensive loans to get. But there are many lenders in the UK who specialize in providing such loans for business owners who have little to nothing to give as security. This is where guarantor loans come into play. They are ideal for all those who lack substantial security assets but are still determined to get a loan to set up their businesses.
What are Guarantor Loans and How do they Work?
One of the simplest forms of loans is guarantor loans. The process involves a borrower – in our case, the business owner and another person or acquaintance who signs as the guarantor. This guarantor is usually a close family member, friend or relative who agrees that if the borrower is unable to keep up with the loan repayments in the set time frame, he/she will pay back the amount to the lender on their behalf.
Since there is no chance of a default in the repayment, it is perfect for all the three parties involved – the borrower, lender and guarantor. Additionally, the individual planning to set up his/her business doesn’t have to worry about having a bad credit history. However, it is best if the guarantor has a good credit history and is preferably a home owner as the lenders need to be sure that the investment they are making is actually a promising one.
Another perk of guarantor loans is that if the borrower continues to make monthly instalment payments, the information gets passed along to the credit referee agencies, helping the individual achieve a good credit rating in the longer run. Once the credit score of the individual improves, he/she will no longer face any difficulty in getting a conventional bank loan that offers lower interest rates and a longer repayment time. The guarantor plays the most important role here as not only are they are helping the borrower attain a loan, but they are also helping him/her improve their credit score for future borrowing.
How can a Guarantor Loan Help You Set up Your Business?
Once you have managed to get a grantor loan, it can help in you in different ways to set up you business. Here are some key areas the money from the guarantor loan can be invested;
- Start-up costs: You can buy an office space, invest in basic necessities of an office, such as computers, working stations and stationary, to run your processes smoothly.
- Staff costs: Employees are any business’ backbone. Even if you are planning to work alone, there will come a time when you will need to delegate functions rather than doing everything on your own. Having a part-time or full-time staff means having to pay them for their services.
- Accounts receivable and payable: Many a times, the supply and demand of the product or service offered by your business declines. Having a sufficient amount in your bank means day-to-day business operations continue to run unhindered.
- Legal fees and insurance: Get legal authorities on board and fulfil all legal formalities, such as basic insurance of your business and employees.
What are Your Other Options? Who said guarantor loans are the only option one has when looking to fund a small business? One can also opt for payday loans or instalment loans if they know that they will be able to repay it in the given time frame. It’s quite understandable that you, as a new business owner, like to opt for loans that come easy, offer competitive interest rates and standardized customer services and have a hassle-free approval process. For knowing which companies are offering that and in what packages, head on to QuiddiCompare to find out. QuiddiCompare has made the comparison of different types of loans, cards and accounts easier. With a competent staff to guide you throughout the loan borrowing process, QuiddiCompare has made researching smarter and stress-free.