Guest Article by Gloria Murray, Accountant and Director of Murray Associates Accountants
It might seem like a really good decision to borrow money to fund your new business or expand your existing salon/spa. Before you do this, make sure you look at your cashflow. You have to make sure you can make the repayments each month without running out of cash. When you raise money, remember this: it’s only the interest and finance fees that are tax deductible, not the capital repayments (the amount you borrowed in the first place)… It’s easy to come a cropper because of lack of planning!
Choosing Between Unsecured & Secured Loans To Raise Money: What’s The Difference?
So what are your options you might ask?
There are two roads you can take to raise money: secured and unsecured finance. Secured means it has some form of guarantee. This might be over your home if you own it, business premises (again if owned), or other assets like expensive equipment (think lasers, etc. and if owned). Unsecured loans are generally based on how creditworthy you are. Of course, this means that if you’ve been made bankrupt in the past or defaulted on credit cards or other loans, then this is not an option.
Unsecured Loan Options
- Family And Friends: This may be open to you even if your credit score is poor. However, I would advise thinking carefully about what would happen to your relationship if you ever couldn’t pay back the loan.
- Bank, e.g. Overdraft: If you don’t need the funds for long, going to a bank is a good option. That being said, make sure you have cash coming into your bank regularly. It reduces your overdraft and the amount of interest you pay, while still giving you the facility to use the funds if you need them.
- Personal Loan: Compared to a business loan, the interest on a personal loan might be lower. And whether you’re a sole trader or a limited company, nothing is stopping you from lending this money to your business. In fact, the interest is allowable for tax.
- Crowdfunding: This option requires asking a large number of people to each donate a small amount of money. Crowdfunding can be unsecured, but it can also be secured on a stake in your business or future services or goods.
- Credit Cards: Doable, but if you have a limited company and you use a personal credit card to borrow money, the fee and interest will not be allowable for tax purposes. Be careful!
- Prince’s Trust: In my experience, they are worth contacting if you’re starting in business. A Prince’s Trust will provide support in the form of grants and loans if you’re between the age of 18-30.
- Grants: There are few grants available to the hair, health and beauty sector. For more information on these, ask your local council and local business support such as Enterprise Ireland.
Secured Loan Options
- Remortgaging or releasing equity from your home or business premises.
If you have a fair amount of equity built up (or no mortgage) this can be an easy to set up and low-cost option. It may also be open to you if you own your business premises.
- Peer-to-peer lending like The Funding Circle.
There are other peer-to-peer lenders, but they don’t all lend to limited companies. For example, Zopa lends to sole traders only. The process of securing this type of loan tends to be faster than obtaining one from a traditional bank.
- Bank business loans.
If you’re a sole trader, you become personally liable when choosing this option as it is secured on your personal and business assets. If you trade as a limited company, you will probably be asked for a director’s guarantee which will be secured on your property.
- Other business loans.
Other loans tend to be high-interest options, and will often still be secured on your home. It’s up to you to figure out whether or not you are okay with that.
Thoughts & Takeaways
Truth be told, without a track record, you will find it more difficult to borrow money. If that’s your case, have a look at The Prince’s Trust or your local business help. To give yourself the best chance of securing funding if you do have a track record, then you must be able to make a compelling case for why you need the funds. Most lenders will want proof that you can repay the debt over a specific and defined period. It’s not enough to have an idea; you’re going to need facts and figures to back it up.
If you choose to go the traditional bank route to raise money, then you will be asked to provide your salon’s cashflow projections, profit and loss reports and balance sheet projections for at least the most recent 2-3 years. You will also be asked for your last 3 years’ set of accounts and management accounts*.
* Your most up to date figures from the end of your last set of accounts to the previous month.
It might feel overwhelming at first, but the trick is to start small! Review your options, narrow them down to 2 or 3 and begin gathering the information you need. If you want more tips on your financials and find out more about numbers in a supportive environment, join my Facebook group Knowing Your Numbers. It’s a safe environment for your questions to get answered.
Thanks for reading! #LetsGrow
Gloria Murray is a Glasgow-based triple award-winning accountant who has also been awarded the Most Innovative Business Advisor in the UK in the 2020 Annual Innovation Awards 2017. Director of Murray Associates Accountants, she specialises in helping small business owners grow sustainable and ethical companies that not only provide a better service to their customers but also contribute to local employment. If you would like to get more business tips from Gloria, you can get a free copy of her printed business magazine by sending an email to firstname.lastname@example.org