Whether you are starting a business, expanding it or investing in it to stay competitive, you may need to borrow money. You may want external finance to cover day-to-day expenses when developing your new product, service or marketing strategy until your business generates enough surplus cash to meet these costs. Alternatively, you may want to borrow money to cover the cost of new equipment or premises.
This guide looks at the advantages and disadvantages of loans and overdrafts, and the purposes for which they are best suited. It provides practical help when choosing a loan or overdraft, including the options available from high street banks and building societies as well as companies offering unsecured loans.

Loans
A loan is an amount of money borrowed for a set period within an agreed repayment schedule. The repayment amount will depend on the size and duration of the loan and the rate of interest.
Loans are generally most suitable for paying for assets, like vehicles and computers, for start-up capital and in other instances where the amount of money you need is not going to change.
The terms and price of loans vary by provider and may be negotiable.

Advantages of loans
	You are guaranteed the money for a certain period - generally three to ten years - unless you breach the loan conditions.
	Loans can be tied to the lifetime of the equipment or other assets you're borrowing the money to pay for.
	At the beginning of the term of the loan you may be able to negotiate a repayment holiday, meaning that you only pay interest for a certain amount of time while repayments on the capital are frozen.
	While you must pay interest on your loan, you do not have to give the lender a percentage of your profits or a share in your company.
	Interest rates may be fixed for the term so you will know the level of repayments throughout the life of the loan.
	There may be an arrangement fee that is paid at the start of the loan but not throughout its life. If it is an on-demand loan, an annual renewal fee may be payable.
Disadvantages of loans
	Most loans have strict terms and conditions.
	They're not very flexible - you could be paying interest on funds you're not using.
	You could have trouble making monthly repayments if your customers don't pay you promptly, causing cashflow problems.
	In some cases, loans are secured against the assets of the business or your personal possessions, eg your home. The interest rates for secured loans may be lower than for unsecured ones, but your assets or home could be at risk if you cannot make the repayments.
	There may be a charge if you want to repay the loan before the end of the loan term, particularly if the interest rate on the loan is fixed.

It is not a good idea to take out a loan for ongoing expenses. Expenses are best funded from the cash received from sales, possibly with an overdraft as backup.

Where to look for a loan

Banks and building societies are the main source of small business loans, but many other companies provide loans at competitive rates. All of the banks in St. Vincent and the Grenadines have business loan departments, though rates and conditions vary. The National Development Fund (NDF) also makes micro loans available to small and start-up businesses. You may be eligible for up to $15,000 in funding if your business meets their lending criteria.

Getting the best loan deal
There are several steps you can take to get the best deal:
 

	Take time to shop around and compare interest rates carefully, as they can vary significantly. Negotiate with the bank manager to get the best deal and ask for any special terms in writing.
	Use a finance broker to propose the best deals for the type of finance your business needs. A broker can save you time and increase your chances of getting a loan by presenting your proposal in the best way to the most appropriate lenders.
	Research the small print. Apart from interest rates, assess other lending criteria, such as loan terms and set-up fees. Investigate any special deals there may be for start-ups. Consider having an expert, such as a solicitor, review the loan documents.
	Be well informed about your own finances. Find out about the factors that affect your credit worthiness and have a clear picture of your business finances. This will help you avoid expensive loans and make sure you get a deal that meets your needs.

Be prepared to switch providers. You don't have to stay with the bank that manages your personal account to be considered for a loan. It's wise to compare loans from at least four providers.

Obtaining a loan and offering security
When securing a loan, there are certain requirements you may need to fulfil. Most lenders require you to:
 

	Find a share of the capital to start your business - perhaps up to the same as you want to borrow. Demonstrating that you have taken on personal financial risk to set up your business will prove to a potential lender that you are committed to its success. If you can provide security, a smaller capital investment may suffice.
	Show that you have contingency plans for repayment of the loan if things go wrong.
	Offer something as security. Decide what personal and business assets, such as equipment and buildings, can be used as collateral for a loan.
	Get professional advice on the terms of the loan and the security requirements of the lender.
	Keep lenders informed of your progress, particularly if there are any changes or problems. The overall personal impression you make to a potential lender is important. They may scrutinise your educational background, your business experience and your employees. The smaller your business, the more closely you are likely to be personally evaluated.
	Have a comprehensive business plan. Cashflow is an area which will be closely scrutinised, as will your payment record with other creditors.
Banks or building societies are used to working with new businesses and can offer advice as well as deals to meet varying business needs. Negotiating the terms of your loan Remember that almost everything is up for negotiation. Aside from discussing basic issues, such as the due date of the loan and the interest rate, you also need to:
	establish what the lender's loan fees are
	check if you can make overpayments
	see if there is an early repayment charge
	find out if you can take 'repayment holidays'
	check to see that late payment charges are practicable

Overdrafts
An overdraft is a borrowing facility attached to your bank account, set at an agreed limit. It can be drawn upon at any time and is ideal for your day-to-day expenses, particularly to see you through cashflow problems.
It is worth noting that loans are probably more appropriate for long-term funding. An overdraft is likely to cost more than a loan for a long-term purchase.

Advantages of an overdraft
	An overdraft is flexible - you only borrow what you need at the time which may make it cheaper than a loan.
	It's quick to arrange.
	There is not normally a charge for paying off the overdraft earlier than expected.
Disadvantages of an overdraft
	If you have to extend your overdraft, you usually have to pay an arrangement fee.
	Your bank could charge you if you exceed your overdraft limit without authorisation.
	The bank has the right to ask for repayment of your overdraft amount at any time.
	Overdrafts may be secured against business assets - the lender can take control of these if you don't repay the overdraft.
	Unlike loans you can only get an overdraft from the bank where you maintain your current account. In order to get an overdraft elsewhere you need to transfer your business bank account.
	The interest rate applied is nearly always variable, making it difficult to accurately calculate your borrowing costs.

 Bear in mind that what starts out as a good deal may change - as may your business needs. It's worth reviewing your options regularly.

Loans from friends and family

Approaching family and friends for funding can be an easy and flexible route to finance. Approached in the right way, this type of funding can provide a fast, affordable solution to your loan requirements.
Benefits
Friends and family are more likely to be able to:

	offer you a low interest loan or one with no interest attached at all
	lend to you over a longer period than conventional sources
	adjust the terms of the loan during the loan period

As they are people who know you well, they will also be a good judge of your character and are less likely to need a detailed business plan from you. See our guide on financing from friends and family.

Avoiding problems
Be open about the risks involved and outline worst-case scenarios.
If you have been turned down by conventional sources, consider whether you should approach your friends or family members for a loan at all. Be open about why these sources may have refused you credit and emphasise to the family member or friend that they should not lend more than they can afford to lose.
Relationships are at stake if problems arise with an informal arrangement. Draw up a formal agreement between both parties involved. Setting down terms of the loan in writing will avoid the misunderstandings that often arise as a result of verbal agreements. If the lender is going to charge interest, include any tax implications for both parties, eg the interest the lender earns from the loan amounts to taxable income.
Review a sample loan agreement on the LawDepot website

Providing a guarantee for your loan

Banks and other lenders are often unwilling to lend money to a new business with no financial track record.
However, even if it does agree to lend you money, your lender may require a loan guarantee.
Lenders commonly ask for assets, such as property, as loan guarantees. They may also ask another person or another business to guarantee the loan. The guarantee means that the lender will claim on the person providing the guarantee if your business cannot meet the repayments.
A loan guarantee could be obtained from:

	you, if you run a limited company
	people involved in the business
	an external guarantor - such as a business person who does not want to make a direct investment but may be willing to take the risk of giving a guarantee

You may have to pay a provider of a loan guarantee a regular fee or a one-off premium - usually about 2 or 3 per cent of the loan amount.
Some loan providers require you to take out loan repayment insurance to cover repayments if your business meets cashflow problems. You could consider this as security for yourself even if it is not required. However, you need to include the cost of this in your total borrowing cost and weigh it against the risk of failing to meet the terms of your loan. If you are using a financial broker, you can ask them to advise on the best insurance deal.

Personal guarantees vs limited liability
If you operate a limited company and your business is new - with no track record - banks and major creditors will usually require personal guarantees from the backers of your business. This may be either the directors, including you, or major shareholders but is often both.
Limited liability generally protects shareholders from being sued by the business' creditors for their personal assets. However, where a personal guarantee for a bank loan is issued, the individual can be held personally liable for the debt.
You should always be careful when giving personal guarantees. Where possible ensure that they only apply to specific debts or loans. A widely drawn guarantee could render you liable for all of the losses of the business. However, under the Banking Conduct of Business Sourcebook rules, guarantees given in support of bank account borrowing must not be for an unlimited amount.