Why should I take out a loan to start a business?

More and more people across the UK are choosing to take their careers into their own hands by the exploring infinite possibilities of starting their own business. Yet although it can be exciting and might make you rich in the long run, it’s a path that carries a lot of responsibility and unique challenges. One of the key challenges you’re bound to run into involves the matter of capital. Without it, you’ll find that ensuring growth and running day-to-day operations will become an uphill struggle. However, there are plenty of funding opportunities available, providing you know where to look. So if you’ve got a great idea for a new business, here’s why you should consider taking out a loan.

Why should I raise funds for a new business using a loan?

Starting a new business means starting everything from scratch. You’ll need to establish a successful supply chain, maintain reliable day-to-day operations, set up internal procedures and work out how you’re going to attract customers to your business. Naturally, this is going to take time, effort, persistence and, of course, cash. Although many entrepreneurs choose to use their own funds, either from personal savings or an existing salary, it’s a risky strategy to use. By depriving yourself of these funds, it could lead to a lack of momentum in the later phases of your development. However, by exploring what external funding opportunities might be available could help you discover a more effective way of laying solid foundations for your business.

Starting a new business in your local area? Wondering what finance solutions are available to you? Apply for a New Business Loan or learn more about how you could benefit.

What finance solutions could I apply for?

Being a newly established business, you’re going to have a limited trading history. This can be problematic if you intend to use traditional methods of fundraising. However, there are many alternative routes that you can take. Thanks to the growing prominence of the Alternative Finance industry, you now have access to more finance solutions than ever before, including, but not limited to, Peer-to-Peer Lending, Merchant Cash Advance and Invoice Discounting to name a few.

Peer-to-Peer Lending

Peer-to-Peer Lending (P2P), or Loan-Based Crowdfunding, allows you to raise capital for a newly established venture using an online platform to communicate directly with a community of investors. As such, you’ll need to promote and communicate the merits of your idea, the competency of your team and express a coherent growth strategy using blogs, videos and live discussions. Do this effectively and there’s no limit to how much you could raise. If you are able to convince them, they’ll join a panel of investors who will pull their funds together in order to form a lump sum. This is then gradually repaid using a Fixed Monthly Repayment scheme over an agreed term that could last up to 5 years, plus interest.

Merchant Cash Advance

Meanwhile, Merchant Cash Advance is an unsecured finance product which enables your business to receive an advance based upon its monthly card-based sales (credit and debit card transactions). Although lenders usually pay little attention to your credit score, they will require you to provide at least 3 or more of your latest, consecutive sales reports. This is a vital part of the application process since lenders will use these reports to calculate your average monthly card-based revenue. So if your business is able to generate around on average £25,000 in card sales, the advance you may receive could be in the same region, if you need it. Plus, Merchant Cash Advance is repaid using a Flexible Monthly Repayment scheme that enables lenders to intercept an agreed percentage from each your card-based sales until the debt has been fully repaid, meaning your advance is paid off when customers pay you by credit or debit card, leaving any cash-based payments unaffected.

Invoice Discounting

Invoice Discounting is a useful way of raising funds on the back of your unpaid business-to-business (B2B) invoices. By using this form of financing, you could release up to 90% of the capital tied up in any invoice worth in excess of £5,000, regardless of whether it involves a late payment or simply that you need to money sooner than the agreed term. In order to qualify, your business must be able to generate an annual turnover of at least £25,000, maintain up-to-date sales ledgers and exercise effective credit control procedures. But, instead of the customer responsible for the invoice paying your business, they’d, instead, pay what they owe into a lender-controlled facility. As soon as the debt is settled, the lender will release a balance to your business. This involved the remaining amount of the invoice (e.g. the other 10%) minus costs and fees.

Need help raising funds for a new business?

Starting a new business in your local area is not without it fair share of challenges. Naturally, with so much potential it’s exciting to see where it may lead. However, for your new business to grow and achieve a sustainable future, access to external funding opportunities is going to be essential. This is an area that can either make or break your venture, with only around 20% of new businesses making it to their 5th year. But if you’re persistent and have access to sufficient amounts of support, there’s no reason why you can’t succeed.

At Rangewell, we’re an Access to Finance specialist who’s mapped over 400 lenders to offer you an overview of more than 23,000 business finance products. Our services are free to use and we’ll also guide you through the application process. So if you’re looking to raise capital for a new business, apply for a New Business Loan today or find out more with Rangewell.