Despite Government attempts to boost lending, latest figures suggest that bank loans for small businesses have continued to decline in recent months. According to the Bank of England, net lending to businesses suffered its biggest drop in April 2013, down by £3bn since December.

If you are struggling to acquire the financial capital you need to start or grow your business, it is important to consider the various funding options that may be available to you. It is crucial to find finance that works for you and your business.

Overdrafts
Overdrafts can provide a flexible means for covering short-term outgoings and unforeseen business expenses. Overdraft limits need to be agreed in advance and interest is ordinarily charged on any money you receive from an overdraft facility. Other charges may also be payable such as arrangement or renewal fees.

Overdrafts should not be used as a long term source of finance, and continued use may lead your bank to question whether you are in financial difficulty.

Loans
Bank loans are taken out for a fixed term, with interest rates agreed in advance, so they are straightforward when it comes to incorporating monthly repayments into your financial plan. Repayment terms and interest rates can sometimes be negotiable, although banks are increasingly asking for collateral as an additional form of security.

Alternatively, borrowing money from friends or family may be an option if they are willing. However, it is important to draw up legally binding arrangements and to make sure every aspect is formally agreed in advance to avoid any potential upset.

Every loan application will show up on your credit file and banks are more cautious about lending in today’s economic climate, so make sure your business plan is solid and your reasons for borrowing are legitimate, before you apply. If you are a perceived high risk to the bank, you may be refused the loan.

Grants and Government support
A grant is usually supplied by the government, local councils or charities, and for those that qualify, it can be a good source of cheap financing. It is non-repayable but there is a large amount of competition for this type of funding and grants are usually only offered to specific sectors or for specific projects that are in their proposal stages. Sometimes you will be asked to cover part of the cost of your project or to match the funds awarded to you.

Following the onset of the credit crunch, a number of Government lending schemes are now available to eligible businesses. Launched in 2009, the Enterprise Finance Guarantee is available to UK-based businesses looking for a loan of between £1,000 and £1m. Under the scheme, the Government underwrites 75% of all qualifying loans provided by commercial lenders to ‘viable’ SMEs subject to certain eligibility criteria and conditions.

Alternatively, eligible businesses using private sector investment may be able to bid for a share of the £2.6bn Regional Growth Fund, which operates across England from 2011 to 2016.
Meanwhile, young entrepreneurs can apply for the start-up loans scheme, which provides finance for 18-30 year-olds who are living in England and looking for finance to start a business.

The material contained in this article is provided for general purposes only and does not constitute legal or other professional advice. Appropriate legal advice should be sought for specific circumstances and before action is taken.