Paying over the odds for our finance

Entrepreneur William Berry on how we’ve landed in a place where personal credit at high APRs is taking risk to dangerous levels

The struggle for small businesses to access financing has clearly reached a nadir as two out of five small and mid-sized businesses are planning to use their personal credit cards in lieu of bank borrowing.

A survey by peer-to-peer lender Rebuildingsociety.com has shown businesses have been pushed to crisis point when it comes to accessing money to grow.

Personal credit is now the most popular form of borrowing apart from bank loans and 37% of business owners are using their credit cards for funding, with an average £22,700 of personal cash invested by entrepreneurs in the past year.

The research estimates that 290,000 SME-owners will use their personal cards to raise cash and 150,000 will dip into their personal savings, and similar numbers will be calling on friends and family to help bolster their businesses.

Dangerous level of risk

And another 50,000 are taking it even further and plan to remortgage their home to finance their business.

While many business-owners will shrug and think that if you’re serious about your business you should be willing to risk everything but entrepreneurs – who are trying to build businesses, provide jobs and therefore grow the economy – are being lumbered with APRs for cash withdrawals that can be as high as 29.9%.

They are paying a premium to finance their dreams because the banks won’t.

How did we get here? It’s quite simple really; the banks shut up shop as far as small and mid-sized businesses were concerned after the financial crisis.

The government Funding for Lending (FLS) scheme was supposed to help improve access to loans. The Treasury made £80bn available to lenders who were then supposed to farm the money out for residential mortgages and business loans.

The former was a runaway success with mortgages galore but the business loans still didn’t come. Even when George Osborne scaled back FLS and stopped the flow of cheap mortgages, businesses still haven’t benefitted.

Movement of money into start-ups has been painfully slow and so it is no surprise that business-owners have turned to alternative sources that although levy eye-wateringly high interest rates at least are available.

Looking for solutions

So what are the options? Well, the banks are obviously still an option as long as you do not need the cash right now, and the rates offered by banks are competitive. Similarly, you could talk to your business bank manager about setting up or increasing your overdraft.

There is also peer-to-peer lending, which is becoming an increasingly relied-up source of funding for start-ups and smaller businesses looking to grow.

While it is a solution it is not the cure-all solution to fast cash; peer-to-peer lending can take time and you have to convince people that what you are doing is worthwhile, has the ability to be profitable, and get them to stump up the cash.

Whichever option you choose you will need to make sure you have a robust business plan in place, no-one is going to lend you anything if you cannot demonstrate how you will pay it back and why they should give you the money in the first place.

And the final word of advice is to be prepared and anticipate your cashflow needs. You shouldn’t need to rely on last-minute personal cash injections if you have set out a clear plan for your business and factored in the need for extra finance.

This will give you enough time to find a cheap source of finance and prepare yourself so that you are more likely to be granted access to it.

In a paraphrasing of a well-known saying: fail to prepare, then prepare to pay over the odds for your finance.

William Berry is a serial entrepreneur and in 2006 was named a Young Gun by Growing Business. He is the founder-director of accommodationforstudents.com, and Vincentbond.com. William is also CEO of the new video start up p6.com, based in California.

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