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Top Tips on How To Avoid Needing A Business Loan

23 June 2017
Written by Jason

We could easily have titled this article, 'How To Bootstrap Your Business', but we don't believe your business should follow a business plan based on cutting corners. We believe that small business loans in the UK are actually one of the fundamental cornerstones of successful entrepreneurship and small business growth.

Top Tips On How To Avoid Needing A Business Loan

We could easily have titled this article, 'How To Bootstrap Your Business', but we don't believe your business should follow a business plan based on cutting corners. We believe that small business loans in the UK are actually one of the fundamental cornerstones of successful entrepreneurship and small business growth.

Whilst we understand the integral benefits of business funding, we also understand that every business should also be looking to ensure they don't overspend, take unnecessary risks or take on more debt than they can handle.

Mike Conroy, the Executive Director for Corporate and Commercial Banking at the BBA recently stated:

"In Q4 2016, over £5 billion of new lending was approved across the regions and industry sectors. Total lending to SMEs stands at £110 billion and within that, use of structured loans increased by £1.5bn (net) last year, suggesting improved business investment. However, total applications for bank finance were 9% lower last year, as businesses explored alternative options such as leasing finance, or continued to build their cash reserves to finance operations."

What this demonstrates is that while the size of loan applications are rising the number of individual businesses applying for them is actually significantly down.

With this in mind here are our 11 top tips on how UK businesses can avoid having to take out a small business loan:

Use Personal Finance - Clearly if you are not looking to take out external funding like a small business loan, then you are going to have to personally fund it.

Complementary skills - If you are lucky enough to be in a partnership in your business, then it certainly pays to have two complimentary heads running it, which can be better than one (or two of the same!). Utilising the different skill-sets you both bring to your company can significantly reduce the need to bring in outside knowledge or talent that you can't afford. Sharing the responsibilities between business owners can be an excellent way of sharing the load and keeping costs low.

Build a business plan - Your business plan needs to tie itself around your budget. Without securing your plan to an expense review, costs are more likely to rise and cash reserves will run out quicker.

Watching your expenses - This means you need to be watching your cash like a cat stalking a mouse. Make sure you set up a business bank account and ensure everything goes through that and not your personal account. Track everything and make sure you account for every spend. In truth this is a practice you should be employing whatever your budget.

Your business model - If you are to avoid getting a business loan, then your business model needs to be able to generate cash flow as soon as possible. Regardless of how careful you are with your funds, without money coming in to your business you are not going to survive for very long.

Work/Life balance - This tip isn't going to be what you expect from a traditional 'work/life balance' reason. If you are to avoid getting a small business loan, then the amount of time you concentrate on your business needs to heavily outweigh the amount of time you concentrate on your family and social life. If you are personally funding your business then it also follows that your personal life must adopt some of the frugal qualities of your business. At least until it starts to generate cash of its own.

Learn fast - If you don't know how do something, then you need to learn pretty quickly, because getting someone else in to do it will cost you money.

Offices - Do you really need a workplace or can you work from home. 'Fake it until you make it' isn't just a glib saying, it is an essential strategy taken by many entrepreneurs and business owners using scaled-down infrastructure to establish an economic foothold or industry position. When the time is right, you can move into bigger commercial premises, but for now, if you don't need to?

Taking on staff - You have two choices; either you can take on new staff and pay them a regular wage (one that even you probably aren't earning); or you can offer them future equity. While the latter is harder to convince, it does take financial strain off your cash reserves and also means your new 'hire' is as committed as you are in getting your business to the next level as quickly as possible.

Ask customers to pay - One of the worst things you can do is allow customers to take their time in paying. A proactive approach, for any company that doesn't have deep pockets is either asking for upfront payments or at the very least getting them to pay on delivery. This way, cash deficits aren't racked up too quickly and the need for either a small business loan or another type of finance isn't immediately required.

Negotiate with suppliers - Most suppliers understand the limits and financial constraints small businesses and start-ups have. If you aren't on good communication terms with them then start now. Getting the best deals and best payment terms relies just as much on your character as a small business owner as your credit rating. The trust and credibility you can build will create a partnership with more favourable rates.

Other Sources of Finance

Of course, there are other sources of finance you can look to get which aren't a small business loan:

  • Start-Up Loan
  • Bank Overdraft
  • Cash Advance
  • Asset Finance
  • Factoring
  • Crowdfunding
  • Peer-To-Peer Loans
  • Family Loans

But let's face facts, most businesses DO need finance in order to succeed and getting a small business loan in the UK in times of austerity and bank reticence isn't an admission of failure, it is an essential tool most small businesses use to get their business off the ground and in position to enter their growth stage.

Common Business Loan Mistakes

At this point you have either decided that your business doesn't need a business loan or you are convinced that for effective growth and cash flow, you do need a small business loan. If that's the case then here are some common mistakes you should avoid making when applying for your business loan:

Not understanding your financial position - If you fail to keep accurate records of your cash flow, including forecasting and bookkeeping then you will not be able to develop or advocate a long term financial plan for your business - which is fundamental to business borrowing.

Heading straight for the bank - Many borrowers don't take the time to look at all their options; there are finance providers for almost any kind of finance you might be looking for. Rushing off to the bank isn't the right thing to do when you are looking for cash advance or if you have less than perfect credit. There are many different specialist finance providers (heavy plant, vehicles etc) and also alternative finance can be more realistic about your poor credit history than the banks.

Calculating business loan costs - Not all small business loans in the UK were created equally, so it makes sense to at least work out exactly how much your loan product will cost you. Interest rates can vary, as can term length, there may be setting up fees or charges and there might even be early redemption fees. So make sure you are fully aware of all the loan costs before you commit.

Borrowing too much - Borrowing too much can be just as costly as not being able to borrow enough. When you don't borrow enough you may be forced to return to your financial provider to ask for more, which can make them analyse your ability to calculate your financials. However, when you borrow too much you are going to have to find the money to pay it back and because you have borrowed excessively, you'll pay more in monthly repayments as well as more in interest too.

Waiting too late - If your small business is struggling and you need a loan quickly, it can be an incredibly frustrating time for you and your business. Financial providers are always worried about a business' ability to pay back finance, but when they are desperate and situations become critical, they often even less willing to part with their money, sensing it might not have a good chance of coming back. Applying early, can help avoid appearing overly desperate and precarious.

Whether your business is just starting out, or you are established, getting a small business loan shouldn't be something to avoid at all costs. While there is merit in trying to make it on your own, and all the good financial practice that comes with  operating on a small budget, you shouldn't be afraid of finance either.

Small business loans can help any UK based company reach its targets. You can get a quick decision by applying online to Access Commercial Finance for loans that can help you grow your business, boost cash flow, increase working capital, purchase assets, pay for emergencies or hiring additional staff.

Originally published Jun 23, 2017 9:07:21 AM, updated June 23 2017
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