Many small businesses need to look for external funding at some stage, with debt finance being one of the most common sources for both start-ups and existing businesses.
Most debt finance takes the form of a loan to your business that ultimately has to be repaid to the lender. The cost to your business is the repayment of the principal sum; interest incurred on it and any additional fees, such as arrangement and valuation fees.
The following are types of debt finance:
The most appropriate type of debt finance for your business depends on a number of factors. You should think carefully about:
How much should you borrow?
To help you decide how much to borrow, look at what the money is to be used for and estimate the costs of borrowing the money. You will also need to prepare a detailed cash flow forecast for your business and include the capital repayments, interest and any fees associated with the debt. This will allow you to see whether your business can manage the costs of the debt.
In order to decide whether to lend you money, lenders will require the following information
What are the risks?
The ultimate risk is that you will not be able to make the necessary repayments due to a decline in sales or for some other reason. The lender could seize and sell the business’ assets provided as security to pay off the remaining debt. If you have given a personal guarantee, you will have to pay the debt yourself, which may require you to sell personal assets.
Hints and tips
By David White, Partner, Charterhouse, based in Beaconsfield
David White is an equity partner in Charterhouse a practising firm of Chartered Accountants based in Beaconsfield and Harrow. David is Charterhouse through and through having been with them for 30 years...
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