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Business Start-up loans 19% APR

A local community initiative is offering loans for start-up businesses and ongoing small entities at approx. 19% APR (£5k-15k; 5-10 years).  This seems rather high to me,  I realise that the High Street banks aren't lending in this sector, but is lending at this rate actually going to help the problem?   Would love to hear the views of other accountants. 

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By dreamcatcher
10th Aug 2012 15:00

If you consider that something like 1 in 3 start up businesses in the UK fails in the first 3 years, is a 19% interest rate for a period of 5 to 10 years really that bad?

The rate of many high street banks for a 5k personal loan over a 5 year period aren't too different to this.

Look at it another way what return would you want for giving someone you didn't know 15k for 10 years? 

Personally I think community banks/initiatives etc can play a vital role in addressing the funding gap that many SMEs encounter.

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By jem
10th Aug 2012 15:57

Loans for Micro Businesses

I completely agree with you, that community banks can play a huge role.  They have issues of scale and that necessitates the high interest rates.  My question really is, realistically, is it an option you would feel happy to recommend to somebody who is starting up a business in this economic climate - at that rate.  A 1 in 3 failure rate says everything about how tough it is for small entities to make the first steps and get on their feet. 

Perhaps I am just out of touch with the market rate for business lending.  To me its slightly eye-watering.

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By dreamcatcher
10th Aug 2012 16:53

The problem is

jem wrote:

Perhaps I am just out of touch with the market rate for business lending.  To me its slightly eye-watering.

The problem is that under the last government we were all used to seeing very low borrowing rates which fueled unsustainable growth and consumers/businesses taking on debt they really didn't need.  We all know how that ended.  So when we see an interest rate of 19% now we think it looks high.  Perhaps in a few years we will see this sort of borrowing cost to be the norm.

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10th Aug 2012 16:14

Had a long standing client in a similar position not long ago.

He's been trading for years, hasn't got a lot of work going on but, needs a replacement pickup truck.

Looking to borrow £10,000 over a couple of years.

Hasn't got the trading figures that says he can pay it back - has got a second property on the market which, when it sells, will release funds.

Looked on the internet, unsecured £10,000 loan over 2 to 5 years were 6% interest.

Had lunch with a local banker, he said they would be looking for 20% interest as the trading figures don't stack up - the second house didn't come into the calculation. 

 

 

 

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By jem
10th Aug 2012 16:24

Micro Business Loans

 

 

This is what really made me ask the question, after seeing a few hauliers getting into difficulty with managing their debt and the kind of interest rates they are dealing with.  It makes you shudder for anyone starting a business, perhaps after having lost their job, if this is the kind of rate they are faced with.  

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24th Aug 2012 14:05

Try Money Circle or Zopa

Try using The Money Circle for a business loan, or possibly Zopa if the individual was looking for a personal loan. These may offer funding, although I haven't personally used either.

Start-ups are difficult, as with no trading history (obviously) or prior years accounts to make a judgement on, you're placing a lot of faith in the individual to make a success of things.

Security for the loan may be little or nothing unless personal guarantees are offered, so unless an entrepreneur puts up their house as collateral; the potential lender will charge high rates.

Good luck!

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24th Aug 2012 15:21

Van itself can be security---may be wise to look at specific asset financing.

 

Sorry-I know Van was not part of original question.

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