Fund your business using guarantor loans

Difficulties in accessing mainstream finance had led some businesses to guarantor lending. But what is it and how does it work?

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In 2016, the average amount needed to start a small business in the UK was £27,520, according to a report from Moneywise. The research showed that the most expensive areas to start a business were around Manchester (£44,733) and the most cost-effective was Newcastle (£17,008).

The survey, which reviewed 850 small and medium-sized businesses, highlighted that when raising funds for their business, 42% of business owners used their own savings and 24% received capital from family and friends. A third of those interviewed spoke of the difficulty of accessing mainstream finance and that banks were not ‘business-friendly’.

For this reason, it is no surprise that more entrepreneurs and business owners are looking for alternative finance to raise money for their business and this includes the popular rise in guarantor lending.

What is a guarantor loan and how does it work?

A guarantor loan is simple. The main borrower applies (business owner) and they need an extra person they know to be part of the application (the guarantor). This additional person is usually a close family member such as a spouse, parent or sibling and they agree to ‘guarantee’ any losses – so if the individual is unable to keep up with loan repayments, the guarantor can step in and pay on their behalf.

This type of finance is especially appealing to those with poor credit histories. Provided they have a guarantor with a good credit score and are ideally a homeowner, they can get the finance they need to back their business.

Furthermore, if the borrower repays their loan on time each month, the information is sent to the credit reference agencies and over time will cause the individual’s credit score to improve. So from the point of the guarantor, they can help the person get the funding they need and also rebuild their credit for future borrowing.

Terms of the loan

Customers are able to borrow up to £15,000 which is repaid in equal monthly instalments over 12 to 60 months. By having a loan term that can last up to five years, it gives the business owner some real flexibility to repay their loan. Plus, if they find that they are in a stronger financial position and their business is booming, they are able to repay early and making a huge saving on the interest payable.

The average cost of a guarantor loan ranges from 39.9% to 49.9% representative APR depending on the lender. The rate advertised is ‘representative’ meaning that it is what will be given to at least 51% of successful applicants and works out to around 0.1% per day. (Source: Guarantor Loan Comparison)

Where does the funding go for a new business?

  • Start-up costs: This includes the basic things you need to get your business going such as an office or premises, computers, desks and any specialist equipment you need to provide your service.
  • Legal fees and insurance: In order to operate legally in your industry, you may require some legal framework and authorisation and also some basic insurance to carry out your business activity.
  • Accounts receivable and payable: For many small businesses, there is a gap between cash coming in and cash going out – and sometimes you need the initial finance to cover your shortfall in cashflow. Common for restaurants, caterers and contractors, having some money in between invoices can be very useful.
  • Staff costs: Whether you have staff members part-time or full-time, having an extra pair of hands to start your business can be the difference between getting it off the ground.
  • Emergency costs: For any potential emergencies such as broken equipment, it can be helpful to have a buffer to cover any unexpected costs.
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