Loan for small business - need advice

M

Material Girl

Guest
Myself and four friends are hoping to open a reatil store soon. We are a newly formed limited company. We all work elsewhere and earn individual salaries, the lowest of these being €30,000. We need a business loan of approximately €160,000 to buy stock, pay rent, labour costs, etc. We have a building we can use as collateral, this is worth roughly €80,000.
We have developed a business plan and approached a lending institution about a loan. While the advisor was impressed with our plans and agreed there was a niche in the market for this business, he refused the loan unless we can increase our collateral.
He advised that we would need collateral worth more than the loan amount. Is this standard procedure for business loans? Need advice please. Also which institution would be the "best" to get a business loan.
 

Brendan Burgess

Founder
Messages
40,231
Hi Material Girl

I would guess that only about 50% of retail businesses survive, so it's not surprising that the bank won't lend you the money. I doubt if any bank would give you an unsecured loan or a loan of more than about 80% of the value of the property.

You need €160k. That is €40k each. I would recommend that you each borrow this in your personal capacities and lend it to the company. If you have homes, it should be possible to remortgage at around 3.5% which is a lot cheaper than a commercial loan would be.

If this is not possible, then you will need an outside investor, but they will want a share in your business.

If you are going into business for the first time, you absolutely must watch the series "risking it all" on Channel 4 on Thursday nights. It's about people going into business together and making such obvious mistakes. You would learn a lot.

Brendan
 
P

palacefan

Guest
loans for small business-need advice

Brendan,

Similar to Material Girl, myself and another guy are opening up a business in the summer and we have both have borrowed €50,000 each at a competitive mortgage rate of 3.25% using our homes as collateral. Later on down the road we hope to purchase a property in our own names which we hope to rent back to the limited company as it will be our business premise.
Question:
Can we borrow this €100,000 into the company as directors loans now to get things up and running and maybe in a year's time when (hopefully), everything is going as near as possible to plan, withdraw the €100,000 out again and use it to purchase the premises.
Would it then be possible to claim back interest relief on the original borrowings against the rental income we would be paying ourselves ?
I hope I haven't made the question too complicated. I will give further clarification if needed
 

Brendan Burgess

Founder
Messages
40,231
Re: loans for small business-need advice

Can we borrow this €100,000 into the company as directors loans now to get things up and running and maybe in a year's time when (hopefully), everything is going as near as possible to plan, withdraw the €100,000 out again
You can lend the €100k to the company. You can charge the company interest. You can write the interest you pay on your personal borrowings against the interest income you receive from the company.

Would it then be possible to claim back interest relief on the original borrowings against the rental income we would be paying ourselves ?
The cleanest thing to do is to pay the loan back to the lender and borrow again to buy the premises. This puts it beyond doubt that you borrowed to buy a commercial premises and you will then be able to claim the interest paid against your rental income from the property.

If you have an ordinary mortgage used to buy your home, you should get the borrowings for the business and the property in a separate account. You should make capital repayments against the home mortgage bit first, as it does not attract much interest relief.

Brendan
 
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palacefan

Guest
re: loans for small business advice

Thanks, Brendan you're a mine of information. Excuse my ignorance but the second last paragraph-should this read "pay the loan back to the lending agency " and then borrow again for the premises ?
Thanks again, Brendan for the prompt reply
 

Brendan Burgess

Founder
Messages
40,231
Re: re: loans for small business advice

Thanks fan

You are correct and I have edited my post accordingly.

Brendan
 
P

palacefan

Guest
re: loans for small business advice

One last question-what would be an acceptable rate of interest that we could charge the company on our director's loans ?
Thanks in advance
 

Brendan Burgess

Founder
Messages
40,231
Re: re: loans for small business advice

I don't know if there are any guidelines. I would simply charge the rate that you are paying on the mortgage. I would not try to make a profit or loss on it. Talk to your accountant about it.

Another thing you should consider is that it will probably make more sense for the company to repay the loan first before paying yourselves salaries. On salaries, you pay income tax and prsi, while there is no tax on the loan repayment. At the end of the year, if you are making a profit, you may have to pay yourselves sufficient salaries to eliminate your Corporation Tax liabilities, but again, your accountant should be your best guide on this.

Brendan
 
P

palace fan

Guest
loans for business

You're right, Brendan I should talk to my accountant-if the fecker would take my calls ! By the time he does I usually know more about a subject than him because of the tips I have received from AAM contributors over the last few months.Thanks again, Brendan
 
M

Material Girl

Guest
Loan for business

Hi Brendan,

Thanks very much for the reply, your advice as always is very helpful. Three of us already have mortgages and would prefer to keep the commercial loan completely separate rather than re-mortgaging. We hope the borrowing can be backed by our personal assets such as our annual salaries and the security listed in my previous post. We hope to use the profits from the company to repay the loan rather than using our own money unless needed.
 

Brendan Burgess

Founder
Messages
40,231
Re: Loan for business

There is an understandable reluctance of people to involve their home with their business loan. However, you should overcome this natural reluctance.

Why would a bank lend to you if they have no asset backed security? They certainly would not lend to a limited company where they would lose their loan if the company fails.

If they lend to you personally, and the business fails, you will be personally liable for the debt anyway. The bank could actually get a judgement mortgage against your home in the event of default.

By giving your home as security you can borrow at 3% instead of the 9% you will be charged otherwise.

If you go into business, you must be prepared to lose your entire investment. If you borrow to invest, you will have to live with the consequences - i.e. a reduced standard of living for the next few years while you pay off the loan. Most people don't really face up to this. They only consider one scenario - a very successful business.In a retail venture, I would guess that you have a 50% chance of making money and a 50% chance of losing your investment.

Brendan
 
B

Breeze

Guest
Re: Loan for business

good luck, just one word of advice
"there maybe a niche in the market, but is there a market in the niche?" anon
 
M

Michael

Guest
AAM

"Another thing you should consider is that it will probably make more sense for the company to repay the loan first before paying yourselves salaries. On salaries, you pay income tax and prsi, while there is no tax on the loan repayment. At the end of the year, if you are making a profit, you may have to pay yourselves sufficient salaries to eliminate your Corporation Tax liabilities, but again, your accountant should be your best guide on this."

That is the kind of advice that allows small companies like mine to plan ahead financially and makes AAM a second to none discussion board!

Thanks!
 

Brendan Burgess

Founder
Messages
40,231
Re: AAM

Thanks Michael

From experience, I have seen many small companies in financial difficulties where the directors are paying themselves salaries while having loans outstanding. It's not uncommon for companies to go into liquidation with loans from directors still outstanding, even though they paid themselves taxable salaries. And auditors and accountants often don't proactively advise them that this is a stupid practice.

Brendan
 
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