In the current economic climate, many start up businesses are seeking alternatives to the banks for commercial funding. Start up businesses are finding it increasing difficult to secure business banking overdraft facilities and business loan facilities. For banks to consider providing a business overdraft facility to start up businesses, many need to show up to 18 months successful trading before being considered for a business overdraft or business loan facility.
To counteract this, many start up business owner directors will invest personal monies into their business in the form of directors loans. Savings and remortgage monies are common sources of directors loans. Also, directors personal credit scores often enable personal borrowings through unsecured loans and credit cards, or, friends and family may lend their own money. However, as with any investment, risk and reward play their part, especially in the current economic climate. These funds are in the main left unsecured within the business.
If a start up business fails with directors loans outstanding, the liability is to the owner directors personal interaction with their business, a calculated risk at the time of investment. The issue in the current economic climate comes when owner directors borrow to invest in their start up business. The risk of failure is not only in losing the investment but the requirement to repay the borrowing. There will be a requirement to find an income, maintain a standard of living and repay the borrowings of a failed business after tax and national insurance has been paid on new income. This can leave a costly long term liability on individuals and affect the standard of living of their immediate family.
For start up businesses there are facilities available able to provide working capital. For start up businesses where debtor books build quickly, invoice discounting facilities can be attainable through banks and other third party providers. Debtor finance can help maintain cash flow without the need for directors to risk personal assets.
For start up business owners wishing to maintain financial independence and control of their business, self investment via a creditor protected trust can be a powerful business funding mechanism. Utilising pension assets in the form of a Small Self Administered Scheme enables owner directors of start up businesses to provide commercial funding. This can negate the requirement for bank funding or personal borrowing to finance the business, whilst requiring the commercial security a third party commercial lender would require.
Many start up businesses are seeking alternatives to the banks, for more information on how to provide working capital without traditional third party funding, please contact us.