How do I get my hands on some money? A simple question and one common to employed people and self-employed people. The first part of this article will focus on the self-employed.
Most people need more money and often go about getting it in the most inefficient of ways. Those of you who used to watch programmes like ‘Your Money or your Life’ starring Alvin Hall will know what I mean.
The programme profiled people who had got themselves into a financial mess. Alvin is the guru who presents them with solutions http://www.alvinhall.com . He then came back a few months later to see how they have managed. It made fascinating viewing with tips of use to most of us in running our finances.
If you need money for your business there are a number of options:
- Take it from savings
- Obtain it from customers
- Borrow on credit cards
- Borrow from the bank
- Extend the mortgage
- Borrow from family
When considering finance it is important to look at the true cost of the borrowing. This is best judged using the APR (Annual Percentage Rate) which is a figure your lender must supply to you.
If you have savings in the bank earning 2% after tax does it make sense to borrow money at 10%? No.
Does that stop people borrowing when they have lots of savings? Surprisingly No again. People sometimes think that the tax relief on interest for business borrowings means they really should borrow money. Wrong – if you have savings then the cheapest finance you have is to use them. (Think about it as you ‘the saver’ lending your ‘business’ money at just 2%.) You can still arrange to repay your savings account in the same way you would repay an outside lender. (By the way don’t try charging your business interest for the savings it has the use of. That won’t work).
Obtaining money from customers? Yes two ways – there is the obvious one of working harder and earning more income. But the other option is to chase your debts more enthusiastically. If your customers hear from you often that you want your money they are more likely to pay you quickly. If they pay you slowly you may come to decide you do not want that sort of customer any more. Remember that this sort of cash flow problem (getting customers to pay you) drives many businesses to the wall. Check out your rights to charge interest and debt collection costs at www.payontime.co.uk .
Borrowing money on credit cards – and this includes not paying the full balance each month – is a mug’s game. It is often the most expensive finance you can find short of that shady character who hangs around the pub. Why pay a card company 25% when you can borrow cheaper?
Borrowing from the bank is the usual route for a business, and reasonably sensible. Post banking crisis this is no doubt less easy than before, but if you can make a good case, banks are still lending. You can choose between an overdraft (which allows your borrowings to fluctuate) and a fixed loan. If you need to buy a car or asset then the fixed loan is best. It is often a way of removing a steady ‘core’ of debt in your overdraft and thus ensuring you actually reduce your indebtedness.
Extending your mortgage is a good way of raising a one-off lump sum to inject in your business. Your house of course must be worth much more than your borrowings. This is often the cheapest form of borrowing, however some lenders will not lend for business purposes.
Borrowing from family can be cheap, but if something goes wrong you will hear about it for the rest of time. Or at best you will suspect there is hidden resentment bottled up. It’s not ideal for large amounts of money but sometimes is the only finance you can get. Having said that just because the banks all refuse you money does not mean you should go to family for it. Take the opportunity to ask why you can’t borrow from the bank. Maybe they see, from a detached point-of-view, that your proposal is rather silly.
If in doubt about financing your business speak to your accountant or bank manager – do not drift into ever increasing credit card debts.
Huston’s Hint
Don’t borrow money for business or a car if you have loads of savings. Better to lose out on 2% interest than pay 10% to a lender. (Even with 40% tax relief the loan still costs 6%.)