2014: Time to set up your own business?

Small businesses have had a rough ride in recent years, often refused loans by banks and building societies reluctant to lend during recent difficult economic times.

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A staggering 80,615 small businesses closed down between 2008 and 2011, according to the SME Growth Monitor from the National Association of Commercial Finance Brokers (NACFB). But it’s not all doom and gloom - numbers have grown by 4.2% in the last two years, and new research by Lloyds Bank found that UK business confidence is at a 20-year high, with orders, sales and profits all forecast to rise.

There’s are other reasons for businesses to be cheerful this year, as from this month the government’s Funding for Lending scheme (FLS), which originally provided funds to banks and building societies to be lent out as cheap mortgages, will be refocused on lending to small to medium-sized businesses.

So for all you budding entrepreneurs out there – this could be your year. Here, we explain what the changes to the FLS mean, where to find business loans, and how you can improve your chances of being accepted….

How the FLS will be re-directed

The FLS for home loans was intended to run until January 2015, but this will now end a year earlier than planned and will now only be used for business loans, which you can read more about in Laura Howard’s article.

Previously, banks could borrow £1 from the Bank of England at various low interest rates for every pound they lent to households, and £10 for every pound lent to businesses. However, from January, there will no longer be a household lending part of the scheme. Instead, banks and building societies will be able to borrow an extra £5 from the FLS at rock-bottom rates for every £1 they lend to SMEs, therefore encouraging them to offer more business loans.

This new regime will last until January 2015.

Banks and building societies have to apply for the FLS through the Bank of England, but most of the major high street names, including Santander, Lloyds Bank, HSBC and Barclays have already signed up.

Help already trickling through

There are already signs that banks and building societies are going to do more to support growing businesses in 2014. In December, NatWest and Royal Bank of Scotland (RBS) pledged £100m to small businesses which will be made available through the NACFB. That means these funds will be offered to businesses which go via a broker for a business loan.

Adam Tyler, CEO of the NACFB, said:  “This exclusive partnership means RBS/ NatWest can call on the regional and industry expertise of NACFB brokers to establish a steady flow of business loans, which will ensure these vital funds reach the companies and sectors where they are needed most.”

Where to find a business loan

You can compare deals from a selection of lenders who offer products to sole traders, partnerships and limited companies using MoneySuperMarket’s business finance channel, which also offers access to several exclusive business loan deals.

Both short-term and longer-term business loans are available. Loans must be repaid in monthly instalments, and interest is added to the amount you have borrowed. You can either choose a business loan with a fixed rate of interest, which means your payments will remain the same over the term of the loan, or a variable rate loan, where your monthly payments could vary over the loan term.

Remember that, as well as banks and building societies, there are a wide range of other finance providers across the UK, including government schemes, regional funds and business angels. Another option is crowd-funding, where businesses looking for finance are connected with those that are keen to invest.

How to improve your chances of being offered a business loan

Banks and building societies will want to see a comprehensive business plan before they will agree to offer you a loan. The plan should explain what your business will do, what sort of products or services it will provide, how customers will access these, and at what level of pricing they will be offered.

Some providers want you to have two years’ accounts before they’ll even consider lending to you, although others will lend to businesses which are just starting up.

When deciding whether to offer you a start-up loan, lenders will assess whether or not you are a good risk, and you will need some security, such as your home or other assets, to secure against the loan.

You can download free business plan templates and find help and advice on how to write your business plan at the gov.uk website, using this link.

What else you’ll need to consider

If you are planning on setting up your own business in 2014, remember that you will also need a business bank account. Although this is not a legal requirement if you are a sole trader rather than a limited company, it does make life much more straightforward when compiling your accounts and managing your business finances. You can shop around for one at our dedicated business bank account channel.

It will also help you get a business loan, as it will provide you with credibility that a bank has already assessed and accepted your business plan. For information about the best business bank accounts, visit our business finance channel.

Remember too that if you set up as a limited company, you must pay corporation tax on all your taxable profits and you will need to send accounts to both HMRC and Companies House once a year.  

If you decide to run your business as a sole trader, then you will pay tax through the self-assessment system and will have to file an annual tax return. Payments must be made ‘on account’, which means your tax bill is paid in two instalments, one on January 31, and one on July 31. The self-employed must also pay National Insurance Contributions (NICs).   You can find out more about the tax implications of setting up your own business by contacting HMRC’s ‘Newly Self-Employed’ helpline on 08459 154515.

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