Imagine you’ve got out to brave the unknown and started your own business. Your product is well received, your employees are enthusiastic and pliable, and your niche market is booming. You’ve overcome all the problems you have long feared: No target audience, failure to market the product successfully, inability to attract or retain staffers, none of those nightmares have come true.
Your business has thrived and grown, and now you face the one problem you couldn’t even comprehend six months ago: You’re growing faster than you can afford to.
From one perspective, it’s the thrill of a lifetime. New orders are coming in; customers are finding you organically; and people are calling about employment opportunities. But as fast as you are putting orders into boxes, more are coming in via phone and the company website.
Your means of production are overrun – you need to build or rent a new facility, get another assembly line going, and the extra talent to run it; and soon, lest you lose your niche market to a competitor.
What Should You Do Now?
At this point, there’s only one decision left to make: How much money do you need to borrow, and from where? But before you get started, there are several terms you need to get comfortable with, as well as quite a few concepts. Otherwise borrowing for your business could prove to be a disaster you can’t recover from.
Terms And Concepts You Must Understand: Borrowing For Your Business
The first term to learn regarding borrowing for your business is the loan agreement, which basically spells out the terms of your agreement to borrow money from a person, business, or institute. The loan agreement can have any number of parameters, but the absolute basics it must include are:
- The repayment date/schedule of dates
- Loan interest rate (if applicable)
- Whether the loan is secured or unsecured
- Amount of the loan
- Whether obligations or restrictions exist on the loan
If you’re borrowing for your business, chances are it’s a substantial amount. Thus, perhaps the most important part of the loan agreement is whether or not it is secured. Depending on the security settings, if a person puts up a house or other valuable property as collateral for the loan, they could risk losing it. The downside is the interest you’ll have to pay on the loan – starting around 4.9% in the UK.
Kay Lyons once said that,
“Yesterday is a canceled check, tomorrow is a promissory note; today is the only cash you have – be sure to spend it wisely.”
If you’re not into such a formal arrangement, you can try a promissory note instead. This can be used either by a pair of businesses or a pair of individuals, as long as the total sum of money is relatively small.
It doesn’t have conditions, but it can be enforced legally, which makes it better than an IOU. You can enforce these in court if absolutely necessary, but they are a lot closer to a “gentleman’s agreement” than a legally binding document.
Borrowing For Your Business: What To Do Now?
So which is right for your business, a loan agreement or a promissory note? In most cases the loan agreement is the overriding answer, as you’ll need to document every move you make for tax and legal purposes, including the generation of more capital. If you’re borrowing from a bank or an investment company, it’ll be decided for you.
But if you’re borrowing for your business from a friend, a family member, or that ilk, a promissory note can help both parties avoid being bogged down in legal matters and get the ball rolling far more quickly.
We know that borrowing for your business can be a tricky affair and confusing for many people. So get a free quote today from a qualified lawyer and let us get you set up with the legal expertise you need to borrow with confidence.
Click the image below to get your free quote.