Small business financing options for tradespeople

Small business financing is likely to be a major consideration if you’re considering running your own trade business.

Reasons for start-up business loans include the need for:

• Small business equipment financing to purchase tools, plant or machinery
• Purchasing or leasing a vehicle for your trade business
• Buying stock to run your trade business
• Paying the initial cost of buying or renting premises
• Recruiting and taking on staff
• Carrying out marketing activities to win business

A useful starting place is to consider the different ways to get funding for a start-up business. We can offer some handy tips on applying for a small business loan.

Having a business plan can also help you with a start-up business loan.

Small business funding options

What type of financing is best for a small business? There are many SME funding options available for small businesses.

Here are the main small business financing options:

• Family, friends, and savings
• Bank loans
• Non-bank loans
• Business grants
• Angel investors
• Venture capitalists
• Crowdfunding

This list of new business funding options is by no means exhaustive. But it’s a good place to start when researching start-up business loans.

Sourcing small business financing

Small business funding options like loans are more likely to need security. That could mean you have to vouch that you’ll repay what you owe.

You do this by ‘securing’ the loan against assets you own. Typically, this could be your property.

Another type of small business financing is a grant. Loans and grants are two of the most popular ways to fund a small business launch.

Grants and loans can come from various sources such as:

• Banks
• Private companies
• Trusts
• Government grants
• Specialist lenders like Funding Circle
• Family and friends

The main difference between a business loan and a business grant? A grant doesn’t need to be paid back. A loan does.

Grants

Although grants do not need to be paid back when funding a small business, there are often conditions on how the grant can be used.

Local authorities often stipulate that a grant can only be used for funding certain types of operations and in certain locations. Grants have no financial risk for the new small business. But the market for grants is highly competitive.

Loans

Loans are issued with certain payback criteria that must be met.

But remember:

• A business loan will have a timescale for making payments including interest payments
• Loans are often issued against business collateral, such as property or equipment which the lender will take if the borrower does not pay back the debt
• Business loans are more flexible in terms of what they can be used for
• There is, however, far more financial risk involved

Non-bank loans can be more expensive

Financial institutions with a full banking licence provide bank loans. Non-bank loans when funding a small business are provided by financial institutions. These are covered by fewer regulations.

They can usually offer small business finance to companies unable or unwilling to accept a bank’s terms and conditions. Also, non-bank loans on the other hand are more readily available.

Non-bank lenders are more likely to take higher risks than traditional banks. This has made them popular with small business start-ups.

What are unsecured business loans?

A secured loan is ‘secured’ against business assets. For example, your property.

If you need to borrow small amounts for short periods, then you might consider an unsecured loan.

Of course, unsecured business loans pose a higher risk to the lender. Unsecured business loans often charge higher interest.

This means they are more expensive in the long term. But it may be the only type of funding you can find.

Small business loans from UK government

There are numerous funding schemes available through local government. Many of these are focused on the renewable energy sector. Grants are available for:

• Boiler upgrades
• Solar panels
• Other energy-efficient home improvements

Naturally, these schemes are often recommended to customers by gas engineers, plumbers, and heating specialists. They are, however, focused on helping homeowners and existing tradespeople.

For local government funding to help with setting up a small business, the competition is fierce.

Many of the schemes are only available in certain areas. And have strict criteria that must be followed to obtain the funding. Have a look through the government website to see what’s available in your area.

Applying for business grants

When applying for a small business grant it’s important to do as much research as possible.

• Firstly, you need to find the best, most relevant grants for your small business
• Next, you need to have a comprehensive business plan to convince the grant provider that your business idea is a good one

When creating a business grant proposal, it’s worth considering the following points:

• How does your business meet the grant qualifying criteria?
• How will you use the grant if successful? Be concise, detailed, and accurate
• Create aims, goals, and criteria to measure success
• Provide evidence on how you will succeed. This can include past experience, skills, and qualifications
• Create a clear and specific budget

Whether you’re applying for a business grant through a government scheme or a private investor, it’s essential to always be professional and confident in your interactions with the funder.

Alternative funding for small business

Traditional financial loans or grants are not suited to all small businesses. Alternative funding for small business is available.

When starting your own small business, it’s worth considering the following options:

Crowdfunding

Crowdfunding has become increasingly popular in recent years.

Small businesses can use crowdfunding platforms to seek financial support for their new business. Crowdfunding is usually separated into two types:

• Reward crowdfunding – Small businesses seek investment through non-financial rewards. An investor may receive a free product. Or marketing as a reward for their investment
• Equity crowdfunding – These platforms let small businesses pitch to potential investors. Potential investors can then offer finance in return for company shares

Equity crowdfunding is particularly popular with small businesses.

They can benefit from financial investment. And real business growth through shareholders who may bring business experience to the company.

Angel investors and venture capitalists

Angel investors are shrewd business people who help start-up businesses with financial support. They also offer their business knowledge and can play an instrumental role in business growth.

The similarity between venture capitalists and angel investors

They are similar – but their key difference is that they are usually part of a larger corporation. They are usually more likely to invest in an already established company. However, there are exceptions to this.

Both angel investors and venture capitalists offer finance in return for equity. That is, a share in your business and its profits.

They play a hands-on role in business development and can often achieve great success.

Getting your trade business off the ground

Start-up business loans can give your trade business momentum. Next, you’ll need to get it growing. That’s where Checkatrade can help.

Our members receive our help with new enquiries. There are lots of other benefits of Checkatrade membership too.

They include:

• Dedicated membership advice team
• Access to trades app with job management, invoicing tool, profile management and more
• Work guarantee up to £1,000 (T&Cs apply)
• Exclusive offers and discounts
• Up to 20% off Public Liability Insurance
• Reduced cost of workwear and branding
• Savings on other business essentials such as vans, fuel and materials

FAQs

How to get a start-up loan with bad credit?

It can be difficult, but not impossible. Specialist leaders can help. for example, the British Business Bank delivers the government’s Start-Up Loans scheme and advises on how to ‘repair’ bad credit.

How much can you borrow to start a small business?

Small business loans range from anywhere between £1,000 to in excess of £500,000.

How long does a business loan or grant take?

A business loan or grant application can take anything from two to three weeks to several months to complete. This will depend on the monetary amount, complexity, and availability of evidence.

What financing option is best?

Grants are the most sought-after form of funding as they do not need to be paid back. Loans vary from lender to lender. What’s best for you will depend on your requirements and financial circumstances.

What is an average loan repayment period?

A typical loan small business loan repayment period is three to ten years. In some cases, small business loans may be taken out over a period of up to 25 years.

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