Starting a business carries a cost, so we look at how family members can become a guarantor, to help get your business up and running.
A recent survey carried out by Moneywise showed that the average cost of starting a business in the UK was around £27,520. The majority of this investment is dedicated to purchasing equipment and expansion plans.
Of the 850 small and medium businesses surveyed, they found that 42% of business owners used their own savings and 24% from family and friends. The rest was funded through mainstream finance and lenders, although many claimed that they were ‘not business friendly.’
Receiving financial help from family and friends is very common, especially receiving the seed money to get the business started. Family members are unlikely to charge you any interest because they want to see you succeed, or in some cases, they may not ask for the money back at all.
Some of the most well-known businesses thrived from money from family and friends. Mark Zuckerberg initially launched Facebook with the funding of his college roommate Eduardo Saverin, while one of the world’s most popular restaurant chains, Nandos, was started from a loan from the owner’s father.
Friends and relatives can be a guarantor
Whilst ‘the bank of mum and dad’ is great, not everyone has thousands of pounds available to invest in their son or daughter’s business venture. There is also the unwillingness of some parents to give up a huge sum of money based on a hunch.
However, what parents and friends can do is be a guarantor for a business loan. This means that the business owner applies with a guarantor lender and asks their family or friend to co-sign the loan agreement. In the event that the borrower cannot keep up, the guarantor steps in and makes repayment on their behalf.
The benefit? Provided that the business owner is reliable and trustworthy with repayments, the friend or family member can still help the entrepreneur get started without making any financial contribution.
What are the terms of guarantor lending?
Applicants can borrow up to £15,000 with the help of a guarantor and repay in monthly instalments over 12 to 84 months (1 to 7 years). The eligibility and amount you can borrow depends largely on the credit rating of your guarantor, with best offers available to those with high scores.
Above all, having a guarantor with homeowner status can be the difference between getting a much lower rate (39.9% APR) compared to a tenant guarantor (59.9% APR) (Source: GuarantorLoanComparison)
This type of borrowing is ideal for those with less than perfect credit scores whereby they can leverage their friend or family member’s creditworthiness to get the funding they need.
However, it also offers start-ups the flexibility to obtain large amounts and repay over a long period of time. If the company find that they are in a good financial position to repay early, they can and will save interest by doing so.