The small business market in the UK has been growing for many years as the entrepreneurial spirit continues to expand in the UK, and the main clearing banks have a firm grip of this market.
They have repackaged their products and offerings to take in every possible requirement for small businesses, but these do come at a cost.
There are many different varieties of loan including:
· Delayed initial repayments, to ensure your business has sufficient cashflow in the early days,
· Interest only loans, which defer the capital repayment until the end of the loan. Again this is very useful for cashflow, but can result in a substantial hit at a later date.
· Staged loan drawdown, thereby reducing the amount of interest payable. Capital is only released as and when required.
· Many banks offer the opportunity to change your payment terms and loan amount on an annual basis, which means that you can tailor your needs to the performance of your business.
· Repayment holidays. In effect you are deferring interest payment, which you will need to repay at a later date, with additional interest. Again, this can be very beneficial for cash flow if you business is going through a quiet period.
· Many banks allow loan over payments, which can either go against paying the loan off quicker, or can be redrawn if required at a future date. An early payment will result in a reduction in future interest payments.
In essence the banks have been very quick to react to a need for highly flexible borrowing instruments, and while these can be very beneficial to smaller businesses, they do come at a price with banks often charging various administration fees in return for the greater flexibility.
As strange as it may sound, one of the main reasons why many small businesses fail is the fact that they do not borrow enough. An under funded business is starting from a weak position to begin with, and it is often better to borrow more than your initial requirements so that you have the option of repaying the excess early.
In the early days of trading, before a business is able to build up a reputation and may be trying different sales methods, cashflow is vital. Cashflow is essential for reinvestment into the business, and to allow the company to expand.
Many banks see borrowing agreements with smaller businesses as an investment for the future, as some of these businesses may well become the large conglomerates of tomorrow.