Financing Your Business

5. Security for Borrowings

For any borrowing you need to show that you can afford the capital and interest payments. In addition, a bank usually wants security to ensure the loan is repaid if things go wrong. There are a number of different possibilities:

5.1 A personal guarantee is a guarantee from an individual.

• If supported by a legal charge over your personal assets, these assets (including your house) can be at risk if the guarantee is called upon.

5.2 A guarantee from a third party, who will be liable to pay the debt if you default.

• Directors of limited companies are often asked to provide personal guarantees in case the company fails.
• Sole traders (and partners) are already personally liable for all business debts.

5.3 If your annual turnover is no more than £5.6 million, another source of security may be the Small Firms Loan Guarantee.

• The scheme focuses on start-up and younger businesses who have been trading for less than five years.
• It can be used to guarantee 75 per cent of loans of up to £250,000.
• Repayment terms and interest rates depend on the lending institution. You also pay the Small Business Service a premium of two per cent a year on the outstanding balance, payable quarterly by direct debit.
• The scheme is operated by Department for Business, Enterprise and Regulatory Reform (BERR) in partnership with a number of private sector financial institutions, including all the clearing banks.
• Ask your bank manager whether you are eligible.For more details and a list of lenders, visit www.berr.gov.uk.

5.4 You may need to take out insurance that will pay out if you suffer an accident, sickness or death.

• This will also protect the bank if you are unable to work.