I need to borrow money

Steps to follow

• How much do you need to borrow? How soon can you pay it back? How quickly do you need it? What assets do you have? These questions need to be answered before you can determine the best way in which to borrow.
• Bear in mind external factors, such as interest rates going up and redundancy or business failure.
• The government runs guaranteed lending schemes for businesses, including the Enterprise Finance Guarantee Scheme, which supports bank lending for up to ten years, and the Small Firms Loan Guarantee Scheme, which offers loans of up to £250,000 to businesses that have traded for more than five years.
• Always read the small print on any loan you take out. Check the APR (annual percentage rate of charge), charges for late payments and deadlines for repayment. Is the rate fixed or variable? Is payment protection insurance included, and if so, do you really need it?
• Credit cards are a very expensive way to run up debt. An overdraft may suffice for small amounts of money. If you need more, can you ask your bank or building society for a loan?
• Private lenders may sometimes ask for a loan guarantee, or assets such as property to secure the loan.
• A secured loan, for example, a mortgage, gives the lender the right to force the sale of the asset against which it is secured. These are usually cheaper than unsecured loans.
• Unsecured loans rely on your promise to repay, and are often more expensive. Early repayment charges may apply.
• If you are buying goods on hire-purchase, remember that this is an agreement to hire not buy until you have paid off the loan. Accordingly, you do not own the goods and cannot sell them without the owner’s permission. You are responsible for any damage that occurs. This is usually an expensive way to buy goods. Check fees, charges and APR.
• Never borrow from loan sharks or doorstep lenders (home credit). Check the company is registered with the Financial Services Authority, and do some research on them, before signing up.
• Beware of taking out a logbook loan (a loan secured on your vehicle). This means the lender owns your vehicle. The interest rates are likely to be high and repayments may be interest only, leaving you the value of the vehicle to pay back at the end. If the lender sells your vehicle for less than the amount you owe then you are liable for the remainder.
• You may be able to borrow interest-free from the government’s Social Fund.
• Do you have poor credit rating? This can be caused by missed credit card payments, bankruptcy or county court judgments. You can obtain your credit history from ratings agencies, check it is up to date and ask them to make any relevant amendments. Making sure you are on the electoral roll can sometimes resolve a poor rating.

What to watch out for

If you are the director or backer of a limited company, you may be asked for a personal guarantee from a lender. Exercise caution in giving this. Make sure the guarantee applies only to specific debts and does not make you liable for all the losses of the business. Do not guarantee an unlimited debt.

Solicitor’s top tip

Businesses can often borrow money in such a way that it reduces their overall tax bill. Tax relief can offset some of the costs of borrowing assets such as plant, machinery or IT equipment. These ‘capital allowances’ are available whether you buy on hire purchase or borrow to buy outright. The interest payable on a loan or hire purchase agreement used to buy an asset is tax deductible as it is a business expense.

Useful links

Free advice

www.direct.gov.uk
www.thisismoney.co.uk
www.hmrc.gov.uk
www.businesslink.gov.uk
www.businesslink.gov.uk
www.is4profit.com
www.smallbusiness.co.uk
www.businesslink.gov.uk
www.jobcentreplus.gov.uk
www.direct.gov.uk
stoploansharks.direct.gov.uk

Online services

www.smallbusiness.co.uk
www.moneysupermarket.com

Useful articles

Overview of loans mortgages and guarantees
Recovering debts from other people or companies