All businesses need to obtain finance from time to time. A business loan will normally be required when you start your company up, to pay for the necessary infrastructure and commence trading before your profits start to roll in. Obviously, the size of the business loan that you will need will depend on the nature of your new business: setting up a florists shop will probably be substantially cheaper than establishing a niche private air charter company, for instance!
It could be possible that an agreed overdraft may be all you need to get up and running, but it’s more likely that you will need a business loan from your bank. Again, in difficult financial times such as these, it pays to shop around. You should talk to as many financial institutions as possible to get the best deal for your business loan – but you may find that one lender has an edge over another in the type of support that they may offer to start-up companies alongside the business loan.
Depending upon the magnitude of your ambition, it may also be worth talking to some venture capital firms who may underwrite your business for a stake in it as an alternative to a business loan. In any event, whether you obtain a business loan or other form of funding (and for your own sake) you will need to provide a well thought out business plan to convince people to back you, or offer that all important loan.
A business loan will typically require some form of security (in the event that the business fails, the lender will want some surety of getting their money back); often this will mean using your home as collateral. As with any loan, a key factor to look at will be the APR (annual percentage rate or interest). Loans usually come with a fixed rate of interest or a variable rate of interest and both have different implications for you as the borrower. Both have advantages and disadvantages: a fixed APR means that you agree on a set amount that will be added to your monthly repayment to the bank, regardless of how the Bank of England base rate changes.
This has the advantage of predictability as you can determine the cost with certainty and they will not vary over the lifetime of your loan. If you could obtain this type of financing, now is the best time since UK bank lending rates are at historically low levels (and will probably only go up). On the other hand a variable rate of interest is less attractive at a time of low rates because (as the name suggests) it can fluctuate. This means that you loose the predictability over the cost of your business loan. In the current global financial climate, your variable APR will start out quite low, but as the world economy claws its way out of recession, the rate will rise, increasing your business costs.
A variable rate loan may be the only option open to you. It is often sold at a slight discount to a fixed rate loan to make it more attractive. In times when interest rates are relatively high (a couple of years ago compared to today’s rates), you might want to gamble on a falling rate – making your business loan cheaper – but you’ll need nerves of steel or a good crystal ball!
As you will have noticed from the news, at the moment the banking industry is in crisis.
It is likely that as a consequence of the current world financial crisis that business loans may become harder to come by or the conditions may be less attractive than before. It is surely ironic that, in the face of a global financial crisis that largely stems from a loss of confidence about and within the financial sector, financial institutions have become much more cautious about lending money to members of the general public, including small businesses.
Lending money is at the very heart of banking sector activities and it is only through the granting of new loans that the global recession that the world is experiencing will be brought to an end. Your small business could help this by increasing the UK’s GDP (Gross Domestic Product, or turnover) by trading with other companies for the things you need and through people buying your goods and services. But of course to be able to do this, you need the banks to give you that all important business loan, so we find ourselves in a “Catch-22” situation.
The recession was largely triggered by the so-called sub-prime lending crisis in which major financial institutions lent money to individuals that were ultimately unable to repay their debt. At the moment, the financial sector seems to be in a “once bitten, twice shy” mindset. Confidence will return to the sector, but the system has had a nasty shock and it will take some time before the money supply recovers.
Sunday, December 13, 2009
Student Loans
Back in the mists of time when I was a student, in the mid 1980s, student loans were just a Conservative Party wish list item. I was lucky enough to get a full grant from my local education authority (LEA) which was just about enough to survive on. Of course, students have always needed more money than they had available (and always will!) and we financed this through overdrafts, part-time and summer vacation working or, if you were lucky enough, rich and indulgent parents. In those days, only a very small proportion of us took out student loans with the local high street banks. These student loans were more of the nature of personal loans (often underwritten by the student’s parents) and did not enjoy any special conditions, in general.
Whereas former UK governments had taken the view that education was a right and not a privilege, Mrs Thatcher, the then Conservative Prime minister, took a different view. It had been believed that attending a UK university would mean that the graduate would get a better job than his peers who went straight into the workforce after leaving school. As a consequence, they would earn more money and pay more taxes, so contributing to the public purse for the cost of their education throughout their working lives. But in the 80’s, the times they were a changing! At first, student loans were proposed as a “top up” measure to support the inadequate LEA grant.
The idea that students should contribute to the cost of their education with fees crept in and the era of the student loan was born – after all, the Conservatives argued, students in the USA had followed the system for years. Nowadays, anyone going into higher education is likely to have to have a student loan.
The UK government has set up a public sector organization, the Student Loans Company (SLC), which provides financial services such as student loans and grants to students studying in the UK. They handle over a million students each year and are also responsible for the administration of the collection of repayments for more than two million graduates. Most student loans are made up of two components: a tuition fee loan and a maintenance (or living costs) loan.
For the majority of students in higher education, their courses will make them eligible for a student loan. Such students are entitled to 75% of the maximum loan, regardless of their personal income with the remainder of the loan being means-tested. These days, for most people, student loans seem to be the only feasible way to pursue higher studies for the average student in UK. Universities can charge students a maximum of £3145 per year and most UK undergraduate degrees have a duration of three years.
The maximum amount that you can borrow on a UK student loan is £4625 for courses outside the London area or £6475 for courses in the capital. So, if you were studying for a first degree in London, the maximum debt you could expect to have upon graduation would be £28860. The loan APR (annual percentage rate, or interest) is fixed at the official rate of UK inflation which means (in principle, at any rate!) that the amount to be repaid has the same value as the amount borrowed. Once the student has graduated and has employment paying more than £15000 per year, the loan must be repaid through the UK tax system. Once this income level is reached, you will pay 9% of your income above the threshold level, until the debt is paid off. If you are self-employed, you will be responsible for calculating and making your own repayments on your self-assessment tax return.
If you work overseas, you need to make a repayment arrangement with the SLC. You can also make additional loan repayments by paying the SLC directly, whether or not your income is above the repayment threshold. Of course, if the interest rate that you could earn on money you have deposited in the bank or stock market pays above inflation (and it should) then you’d be foolish to pay your student loan off early. I can’t help but look back on my college days with a warm feeling of nostalgia for a kinder age before the evil of the “market forces” mantra was unleashed on an unsuspecting world!
Whereas former UK governments had taken the view that education was a right and not a privilege, Mrs Thatcher, the then Conservative Prime minister, took a different view. It had been believed that attending a UK university would mean that the graduate would get a better job than his peers who went straight into the workforce after leaving school. As a consequence, they would earn more money and pay more taxes, so contributing to the public purse for the cost of their education throughout their working lives. But in the 80’s, the times they were a changing! At first, student loans were proposed as a “top up” measure to support the inadequate LEA grant.
The idea that students should contribute to the cost of their education with fees crept in and the era of the student loan was born – after all, the Conservatives argued, students in the USA had followed the system for years. Nowadays, anyone going into higher education is likely to have to have a student loan.
The UK government has set up a public sector organization, the Student Loans Company (SLC), which provides financial services such as student loans and grants to students studying in the UK. They handle over a million students each year and are also responsible for the administration of the collection of repayments for more than two million graduates. Most student loans are made up of two components: a tuition fee loan and a maintenance (or living costs) loan.
For the majority of students in higher education, their courses will make them eligible for a student loan. Such students are entitled to 75% of the maximum loan, regardless of their personal income with the remainder of the loan being means-tested. These days, for most people, student loans seem to be the only feasible way to pursue higher studies for the average student in UK. Universities can charge students a maximum of £3145 per year and most UK undergraduate degrees have a duration of three years.
The maximum amount that you can borrow on a UK student loan is £4625 for courses outside the London area or £6475 for courses in the capital. So, if you were studying for a first degree in London, the maximum debt you could expect to have upon graduation would be £28860. The loan APR (annual percentage rate, or interest) is fixed at the official rate of UK inflation which means (in principle, at any rate!) that the amount to be repaid has the same value as the amount borrowed. Once the student has graduated and has employment paying more than £15000 per year, the loan must be repaid through the UK tax system. Once this income level is reached, you will pay 9% of your income above the threshold level, until the debt is paid off. If you are self-employed, you will be responsible for calculating and making your own repayments on your self-assessment tax return.
If you work overseas, you need to make a repayment arrangement with the SLC. You can also make additional loan repayments by paying the SLC directly, whether or not your income is above the repayment threshold. Of course, if the interest rate that you could earn on money you have deposited in the bank or stock market pays above inflation (and it should) then you’d be foolish to pay your student loan off early. I can’t help but look back on my college days with a warm feeling of nostalgia for a kinder age before the evil of the “market forces” mantra was unleashed on an unsuspecting world!
Home Equity Loans
By using your equity as collateral to your loan, you can have access to a sum of money you can use for different kinds of purposes: perhaps your child needs to continue his/her studies and funds are needed, or the family might want to buy a new car, or you could use that money to consolidate your debts. As seen, there are many uses of a home equity loan; the most important thing is that you make use of that amount smartly. Ideally, when contracting a home equity loan, you should spend the money on something useful rather than just on expensive vacations or luxury items. For example, if you use it on making home improvements, that is a good investment, because this way the real value of your asset increases, so that in case you plan to sell your house in the future, you will earn extra on it. While in case you use your money just on spending without investing it, there is practically no profit for you. The most important thing you need to know about home equity loans is that everything works just as in the case of a secured debt (where your home is at risk), and until you manage to fully pay off your debt, there lies the risk for your home to be sold. That is why you must act responsibly in such cases, not to jeopardize your family’s well-being. There are advantages but also disadvantages to this type of loan too. The first disadvantage is the problem of foreclosure that may rise in case you can’t make the regular and steady payments you are supposed to; then, you should expect to pay higher interest rates, and depending on the purpose of your contracting such a loan you should be able to anticipate whether this type of loan is convenient to you or not. It is also important to mention that there is more than just one type of home equity loan you should consider: there is the fixed rate mortgage loan and the HELOC (Home Equity Lines of Credit). In the case of fixed rate mortgage there are little to no changes regarding the sum you have to repay, so all you need to do is steady, regular payments for the time of the loan. The good side of this option is that recalculations or changing interest rates all the time are not factors to hinder you, because there is a set amount with a set interest rate and that’s it. From the point of view of flexibility it is not the best option, but in case you have a regular income this is the option for you. The fixed rate mortgage loans are also known as close end home equity loans. As an other option, there is the open end home equity loan, or, as mentioned above, the HELOCs. As its very name suggests, it is credit you will be dealing with, in case you opt for it. With this type of credit, you will have access to a line of credit, usually a sum agreed to by your lender (these amounts can be as high as the real value of your home), and you can each time just borrow up the amount you need. From a procedural point of view, think about it just as the use of a credit card is; only in this case you are playing against yourself in a way, because in case you fall behind with your payments on a regular basis, there is the risk of losing your home. The good thing when using HELOC is that there is a variable interest rate involved. There is always a minimum amount of money you have to pay back, but of course never forget the interest rate. It can be said that by choosing this type of loan you are practically your own boss, you have a free hand in making your calculations, being your own financial manager and accordingly setting a monthly sum you will pay back. As long as you act wisely, advantage is on your side. Of course, you can await some extra fees such as title fees, arrangement fees, or appraisal fees, but these also might come with just any kind of loan also. In case you don’t know which type of home equity loan to choose, or which one would advantage you, seek the help of a financial counselor which may broaden your horizons and you will be able to understand debt and credit related problems better and also get valuable information regarding the best option that suits your case in particular. |
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