A business loan can mean the difference between success and failure, particularly in the early start up days when business costs seem to constantly outweigh contract income. As a contractor, a business loan can be very useful during you first few contracts as you get to grips with your finances or as part of sustained working requirements including buying a car, specialist contract equipment.
How to use the Business Loan calculator
- Enter the Loan Amount. The amount of money you wish to borrow.
- Enter the Annual Interest Rate
- Enter the Term of the Loan in months. This is the amount of months that you would like to take the loan for. 60 = 60 months = 5 years
What is a Business Loan?
A business loan is like any other kind of loan - it is the borrowing of money from a source with the intention of paying it back. Unlike other loans, there can be issues with taxes and tax-related assessments. This article explores some of the reasons, benefits and pitfalls to taking a business loan.
Why Take a Business Loan?
There are many valid reasons for taking out a business loan.
- Start-Up loan: If you are thinking of setting up a business, but do not have sufficient funds to cover the expenditure for items to allow you to conduct your work, a 'start-up' loan cold be a solution to your cash-flow problem.
- New service provision: An established business may decide to broaden its scope of work eg a carpenter that makes bespoke kitchens, may decide to branch into furniture making and wants extra money to spend on specialist equipment and advertising.
- Expansion: A business may want to expand its current premises, output, staffing, etc, but does not have sufficient profits to facilitate this.
- Purchasing goods: A business may want to update or replace equipment to keep up with demand and needs an injection of cash to facilitate this.
- Failing business: Some businesses assume that an injection of cash will resolve 'cash-flow' problems. Though it may act as a prop for a short term issue, it is unlikely that a business will succeed, unless something changes when taking the loan.you are in danger of throwing 'good money after bad'.
Process for a Business Loan
- Advice: Seek advice from people in the same profession, family and friends, as well as professional advice from the finance section. This can be invaluable in helping you decide if you need a loan and more importantly, if you can afford it.
- Business case: It is essential to provide a good business case to your prospective lender. You should include:
- Overview: What does your company currently do? Provide accounts information too.
- Rationale: Why do you need the loan? Describe the issues with the current set up of the business.
- Scope: What is the loan actually for and how much do you need? Describe what you will physically spend the money on.
- Benefits: What will the company benefit from by taking a loan?
- Timescale When will you implement changes to your business?
- Quality Assurance: How will you measure the impact and success of the outcome, resulting from the loan?
- Sureties: What assets, if any, are you willing to risk for the loan? What assurance can you give the lender that the loan will be recouped?
Find a lender
This is the easiest and hardest thing to do! It is easy to get someone to lend you money, but harder to choose a lender that will not have extortionate 'pay back' rates. Be careful of packages that seem too good to be true..they usually are! Consider:
Shopping around - compare different banks, building societies, loan companies, single investors. Do they have a set-up fee, high rates, early repayment penalties. Do they have a good reputation? Generally speaking banks and building societies have better reputations than single loan companies, who can have a 'pay back' percentage rate higher than the high street lenders (banks & building societies).
Contract agreements - Many people feel under pressure to just 'sign on the dotted line', rather than reading the small print. It cannot be stressed enough how foolish you would be to risk your business, because you feel uncomfortable taking too long to read a document. A loan agreement sets out the Terms and Conditions of your loan and is a legally binding document, READ IT WELL! Seek clarification for anything that you don't understand. Terms and Conditions include, amount borrowed, rate of repayments, duration of the loan, any forfeitures and penalties for non-payments.
Alternatives to taking a business loan
Stop, Think... Do you really need a loan? It is advisable to avoid taking a business loan if you can. They can be costly and cause you added pressure to make more money, more quickly. Although your aim is to make money, you need to manage your business effectively, without having to make 'snap decisions', because you can't meet repayments, which may impact on your ability to perform in the future, lower your standards to cut overheads, etc.
It is of benefit to you to talk to business/financial advisors, bank managers and your accountant to be sure you know the risks. Alternatives include:
- Do nothing Consider if the alterations and amendments to your business are really necessary.
- Defer changes Is the time right to implement these changes.
- Workarounds Can you do some tasks to make changes, so that you don't need to spend so much money?
- Family & Friends Can people around you help out financially, without wanting a massive return for their money?
- Single investors/shareholders Is there scope to sell shares in your company to generate revenue for growth?
Issues & benefits
- Work can be undertaken the moment the money is available.
- You know what the pay back rate is going to be, so can budget.
- You may see the benefits to changes more quickly.
- Further expenditure.
- The changes that the loan was for, may not actually improve your business.
More to add on Business Loans?
Have more to add or want to share your experiences of obtaining a business loan as a contractor? Contact us or share your experiences in our contractor forum.
You may also find the following contractor calculators useful for your salary and tax calculations.
If you are looking for accounting support with your new limited company or if you need support setting up your accounts as a contractor, iCalculator recommends Tempo, a solid, dependable company that the team at iCalculator have known and worked with since 2009.
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