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Factors in Business Planning for Small Businesses

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Abstract

To start or improve a business requires starting capital. Such capital can be secured in terms of either an overdraft of a term loan. Depending on the magnitude of the business, a short, intermediate or long term loan can be requested from the bank. The bank requires security in case of defaulting.

Introduction

The following write up is a discussion of the factors that needs to be considered by a small business that is looking forward to opening a new branch but cannot fund itself from within. A visit to the bank for a loan calls for a thorough consideration.

For small business in need of financing, banks are usually the most preferred option. One ought to take the correct type of account since each has a different rate, cost, term and offers. Other finance offered by a bank should be taken into account as part of a whole package because the best account may not necessarily have the best facilities for overdraft.  For a small business, a bank that has simple terms and appealing introductory fee should be offered the first priority. Banks offer two types of finance, viz; account overdrafts and bank loans.

Most banks offer loans to both existing and new businesses after a demonstration of a viable business at hand and also security for the loan on ones house. Depending on the business, the amount of available security and the quality of the plan, loans from a bank might range from 1000 to hundred thousand pounds. The moment a loan starts, an arrangement fee might have to be paid up front.

Periods for repaying the loans may range from one year top more than twenty five years. Such details depend with the lender and each lender might have varied loans that are tailored to varied business needs. When security is not enough, extra security may be got by the lender from the Small Firms Loans Guarantee Scheme by the lender.

When businesses have made payments from their business current accounts that exceeds the cash available, overdraft financing can be provided. Such an overdraft facilitates the receipt of a short-term funding. The amount is payable to the bank on demand. In order to determine the appropriateness as the source of funding for the business, several important factors ought to be put into consideration. These include the amount, interest, size of the overdraft facility among others. These though, are the main factors. The borrowed amount ought not go beyond the limit that had been agreed or facility. The amount of the facility that gets presented is an issue of negotiations with the bank.

Interest gets charged on the money overdrawn at such a rate that is above the bank rate, but the bank may decide to charge a fee for the overdraft facility. One advantage of an overdraft is that it is usually flexible and assists to maintain cash flow, and this is a vital aspect of any business venture. Interest can only be paid on the amount of the overdraft being used by the borrower and therefore it costs very little to avail as a backup cash flow. Generally, overdrafts are meant to cover requirements for a short time financing and not to offer a permanent finance source. Security may be requested by the bank depending on how big or small the overdraft facility is. The cash flow of the business, seasonal sales trends, timing of payment s and receipts and so on, determines the amount of overdraft at any one time. As an example, if a business generates a positive cash flow overall in a full year, it may require to fund an overdraft though temporary during the year, due to the timing of the receipts of sales as compared with payments to suppliers. An overdraft can be converted to a medium term loan by the bank if the business realizes that an overdraft is turning into a long-term feature of such a business. The level of an overdraft facility can be adjusted and reviewed by the bank, maybe on a short term basis. The bank has got such flexibility. An overdraft can be used effectively as a medium term loan in which case the facility gets renewed each time the bank gets to review it. A balance on the overdraft is usually not included if the business calculations of financial gearing, being a part of a short term debt.

The most common types of small business loans are term loans. Their simplicity is derived from the fact that the lender offers a specified amount of cash, In most cases a fixed rate interest, and a schedule for repaying the loan is prepared, mostly in quarterly and monthly repayments over a specific time period. These loans can be for a period less than a year to provide a business with the working capital during a certain particularly busy season or for buying or purchasing  new equipment. An intermediate loan may prove beneficial for the purchasing of a more expensive equipment or for the remodeling or expansion of the business. Such loans mature in one, two or three years. To start on a business venture a long term loan is the most preferable or maybe for making other considerable improvements or establishing a second location for the business. The most common off the three types of loans are the intermediate and the short term loans for the small businesses.

The knowledge of the best suiting type of loan and the various types of loans being offered by the banks is the easiest bit. To obtain the loan from the bank is the most challenging but doable. Typically, businesses that already have money are the ones to which banks lend money making it very difficult and challenging for new business to secure a term loan. This of course is the case because the banks want to know what is on offer as collateral for the loan. Businesses that are already established can simply put up accounts receivable, equipment or property as collateral for a loan that they have secured. For a loan which is unsecured, the credit history of the borrowing business will be the one to be looked at by the lender. For the unestablished business that is the sole partnership r proprietor the loan repayment responsibility falls on the owners who can be requested to provide a personal guarantee. This makes it paramount to determine carefully the purpose of the loan, its benefits to the business, from the expanding profit margin perspective, and more importantly how the principal could be repayed, if it had to be repayed. Such considerations ought to be made before signing for the loan.

Loan application can turn out to be time consuming and cumbersome. In most cases the following are the requirements by the bank during the signing for their loan: a financial statement for not less than three years, the returns on tax for the past three years, the type of collateral on offer, a personal guarantee for a new business, short-term loans, or if the collateral is insufficient, the business owners credit report and the business plan. A show that the borrower has invested in the business is also a pre requisite. Lenders have a preference for the borrower who has invested their own money in their businesses because they are less likely to turn out to be loan defaulters.

Credit history of the borrower would be subjected to scrutiny for short-term unsecured loans by lenders, in much the same way that a home mortgage potential borrower gets evaluated. Quick repayment of a short-term loan opens the highways to obtaining such loans in the future much more easily, through a buildup of credit and an established relationship with the lending bank. To enhance a business’ credit rating, one should attempt to take a loan provided it is possible to repay it, even if the business does not require one. Higher credit rating makes it much easier to obtain a loan in the future.

The liquidity and greater flexibility on finance that a borrower possesses, makes ter loans advantageous while preserving their working capital. A stay at the top of the repayment schedule is however emphasized. The fees involved or being charged should also be known to the borrower. It should be one percent of the overall loan borrowed. All the terms for the loan should be reviewed in advance including the fees being charged to assists when looking around for the loan and making not only s comparison of the interest rates, but the overall  packages for the term loans, as well.

Conclusion

A thorough consideration and scrutiny of the terms of the loans being offered by various banks is paramount in order to determine the best loan package overall. Such terms include the interest, amount of loan and the magnitude of the overdraft facility among others.

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