Borrowing money to establish a small business can be a difficult task, as this type of loan can be risky for lenders. As a general rule, you'll need to have some equity in your business, either by a direct cash investment, or by providing some sound marketable security, such as a second mortgage on your house.

Preparing to approach a business lender

Before approaching a lender, make sure you're fully prepared. You'll be required to have the following information with you.

• A business plan containing well-researched evidence that a market exists for your product or service, the basis for your estimated sales, and evidence to confirm your major expense items. Your gross profit margin should be within industry standards.
• A statement of personal assets and liabilities clearly identifying those exclusively in your name and those in joint names.
• Details of security available to back the loan up if necessary, and details of any debt secured by way of mortgage, bill of sale, or other means.
• A clearly defined repayment plan that allows for interest rate rises during the period of the loan.

Sources of finance

• Banks: consider starting with your own bank. They'll have access to your financial background and may already have security. This may save you considerable establishment costs. Banks are the largest providers of business finance.
• Building societies and credit unions: a source of finance. Business lending is not usually the core business.
• Finance companies: active in business lending and can often structure a loan using a combination of short and long-term lending.
• Finance brokers: you'll normally pay a fee for their services, which needs to be considered in your budgeting. Often the fee you pay can be offset by savings on interest rates and lender establishment costs.