How to Start a Business With a Poor Credit Profile in the UK.
How to Start a Business UK by Hamilton Wood & Company
Starting a business can be a daunting prospect, however, those who have done it will advocate it is one of the most exciting and rewarding endeavours you can undertake. Indeed, many individuals have this project on their bucket list.
The UK has a very long and proud history of changing the world of tomorrow for the better. It is apparent that too many people in the UK have novel ideas with the potential to change the world forever but the idea can evaporate equally as permanently if the individual can’t access the finance and funding to develop the idea.
In our experience, people with CCJ’s might be prevented from accessing the finance and funding they need from traditional avenues which can lead to them wanting to give up on their business ideas but don’t be disheartened, there are options still available to help you and we will cover them later in this article.
Before starting a business, it is worthwhile considering what it is you are going to provide, will it be a service or product and what about the potential market?
It is important to reason whether your idea has commercial merit and it is good to give yourself a reality check before you embark on any new business venture. You have to satisfy yourself, and potential investors that the idea is viable and can return a profit.
All too often we see individuals whose hobby or particular interest leads to them wanting to create a business off of the back of that interest, however, proceed with caution.
If your business caters to a marginal niche, and the profit margins are small, then you are on thin ice from the get-go unless you can quickly gain exposure to the masses.
It is usually best to focus on something that both male and females want or need and where possible they command a decent margin. Examples could be clothing, mobile phones, motor cars etc.
It is important that you have a ‘go-to-guide’ when starting a business so it is essential that you formulate at least the bare bones of a business plan.
A business plan is essential to help keep you ‘on-track’ and ‘focussed’ on the bigger picture so-to-speak. To download a free business plan template click here.
Separately, preparing an extremely conservative cash flow forecast is a good idea, and also a decent reality check for everyone interested in starting their own business either in the real world or online.
Part of a cash flow forecast is planning your survival budget should your dreams of instant world-domination not happen overnight. To download a free cash flow forecast click here.
Already you can see that when it comes to starting a business, simply asking how to start one can lead to a seemingly endless list of additional questions so, in this article, we will focus on what we feel will help you cover some ground quickly.
OK, so let’s assume that you have an idea in mind and that you now want to take the idea to market.
Most businesses need a foundation of capital investment to grow, whether that’s your own money or that of an investor but not everybody is able to get credit, let's say for example if you have accrued County Court Judgements (CCJ’s).
We will cover a number of options depending on your personal circumstances in this article including how to start a business with a bad credit rating.
Type of Company
Now that you have an idea of what it is you are going to do, it is important to decide on the legal definition of your business.
Some types of companies are able to gain access to helpful incentives and tax relief others aren’t, and some protect your personal assets whereas others don’t so it is extremely important to cover this bridge before you start trading.
Sole traders are where just one individual is the sole owner of the business.
Advantages and Disadvantes of Being a Sole Trader.
Decision Making – The success or failure of the business rests purely with one individual.
Finance – Accessing finance and funding can be challenging when working as a sole trader.
It is well known that sole-traders can have extreme difficulty in securing private mortgages when looking for a new home.
Struggling to access finance can stifle future growth plans too, so this legal business type might not be the best if your intention is to grow a scalable business model.
Economies of Scale – Sole traders often can’t leverage discounts on bulk purchases in the same way that larger companies do.
Moreover, larger companies have contingencies in place should an individual get sick or have to have time off.
Who will provide your income if its just you and you can’t work?
Liability – Arguably the business entity carrying the largest degree of personal risk!If you amass debts then you have unlimited liability which means that your home, your savings, any assets etc. can be pursued by those you owe money too.
Profit - Sole Traders retain 100% of the profits generated.
Control – Let’s face it, the reason most people start working for themselves is that they want to make their own decisions and not be bossed about by anyone else.
Being a sole trader can be an effective way to be your own boss but on a rather insular level.
One key advantage here is if you are not really a people person, you can limit the workforce to just yourself if you choose.
Secrecy – Unlike companies registered with Companies House, data surrounding the activities of Sole Traders remains private and is not published in the public domain.
If you have an idea that is unique in the marketplace and you don’t want prying eyes, then this is one solid reason to register as a Sole Trader.
Personal – The speed of the decision-making process isn’t slowed down unnecessarily.
A sole trader can quickly respond to the needs of his/her customers.
LLP – Limited Liability Partnerships.
LLP’s were introduced in the year 2000 and were brought in to provide professional partnerships limited liability rights only previously available to companies.
Public Disclosure – All company information on profits, assets, directors etc. will be made available in the public domain.
Equally, although service addresses are now allowed, they will be in the public domain.
If a partner registers their home address this could be publicly available which might not be ideal for example if you are a criminal lawyer.
Min Headcount – An LLP needs at least two individual partners to exist. This means if one needs to leave for whatever reason, the partnership may need to be dissolved.
Accountancy – Profit can’t be retained in the same way it can in a company limited by shares. There is no potential to hold profit over to a future tax year as all profit is distributed amongst shareholders.
Limited Liability – Limited Liability protects individual members personal assets from the liabilities of the business.
In much the same way as a limited company, individual members of the LLP are separate entities.
Company Structure – Unlike a limited company who must appoint a physical human being as a director, and LLP can be controlled by two member companies.Flexibility – Profits and the distribution of responsibility and decision making powers can be determined by written agreements between all constituent members of the LLP.
Limited companies are probably the most popular company entity in the UK and for good reason.
There is a myriad of benefits surrounding limited companies that can help business owners maximise profits, whilst limiting their exposure to private risk.
Complex Accounts – Accounts need to be filed every year. You have to file your accounts at companies house and your accounts will be on public record. It is required that you file accounts, corporation tax and company tax calculations with the HMRC every year.
Paperwork – Every month, a certain amount of paperwork will need to be attended to. Bookkeeping is essential when it comes to the smooth running of a limited company.
An average of 20 – 60 minutes per month will be required to complete the necessary paperwork and accounts.
Cost – There is a common misconception that limited companies are expensive to set-up, however, that is not true.
Restricted Capital Raising Opportunities – Unlike PLCs, Limited companies have a restriction on raising capital via the sale of shares.
Bear this in mind if you are looking to grow your company via this route to finance and funding.
Power Dilution – Share in limited companies determine the power held in a business.
If too many shares are sold, this can lead to companies original directors losing control of the company and sometimes being sacked from a company they started as was the case with Steve Jobbs of Apple many years ago.
Hostile takeovers are a real potential threat so it is important to retain as many shares in the company as possible to retain ownership, and control.
Limited Liability – Probably the single most attractive feature of a limited company is that is seen as a separate entity to the individuals that own shares in it.
This means that company directors and shareholders will only be responsible for the debts of the company at equal to that of their investment in it.
Separate Entity – We have already touched on this point but limited companies are a separate entity in their own right from the directors and shareholders. This has the benefit that the company can survive for longer than the life of its directors.
This provides added security and peace of mind for any employees if a director dies or retires, the company will be able to continue, and so their jobs are relatively safe.
Tax Advantages – Limited companies are only taxed against their profits and therefore not subject to the high tax rates of partnerships and sole traders that can reach a massive 40% tax.
Furthermore, only limited companies who are liable for UK tax can access rewarding government incentives including R&D Tax Credits and Capital Allowances which provide substantial tax relief for the company in question.It is recommended that if running a limited company, you should pay yourself the national minimum wage and then leverage dividend payments to yourself as you can take the first £5000 tax-free, and then anything over that is taxed at a lower rate than if you were taking more on a PAYE salary.
Partnerships are a good choice of company structure when there are two or more people with skills that complement each other.
As with all business structures, there are pro’s and con’s that we touch on in the table below.
Collective Agreement – Reaching agreement on common business decisions is key, and when collective agreement can’t be reached this can lead to disagreements and internal conflict…
Disagreements – Let’s face it, fall-outs and arguments happen but if a rift develops in a partnership this can cause real headaches for all concerned. It's not unknown that companies can be split into many warring factions when disagreements occur.
Different stakeholders may have differing ideas on how the company should be managed and so it is important that any disputes are sorted out quickly for the benefit of all concerned.
It can only serve to hurt a partnership if its management team aren’t talking.
Liability – Every one of the shareholders carries unlimited liability for company debts. That means if things go belly-up, each of the partners will be pursued until any debts and outstanding liabilities are paid.
Tax – One substantial area of concern is that those involved in partnerships are subject to the same tax thresholds as sole traders meaning, that you can be taxed as much as 40% of profits.
If you want to reduce your exposure to tax then you should consider forming a limited company or perhaps LLP.
Shared Responsibilities – Sharing responsibilities based on each of the partners skill-sets would be a prudent move.
For example, one partner may have a flair for marketing and so they handle all of the companies email newsletters etc. whereas the other partner might be better and more comfortable delivering company presentations.
Being able to allocate tasks to the most competent person will only benefit the partnership, whilst ensuring each person is more likely to get job satisfaction from their workload which will lead to a happier, healthier partnership all around.
Decision Making - Being able to share and confer opinions and thoughts can lead to businesses making better strategic decisions.
It’s true that the whole is often greater than the part.
Flexibility – Partnerships are for the most part, less strictly regulated than limited companies.
Partnerships are also relatively quick and easy to form and management decisions aren’t influenced by other people like shareholders in a limited company.
Capital – The partners of the business will fund the partnership with start-up capital.The more partners there is the more potential a greater amount of money can be raised however, this can also increase the potential for disagreements.
Plc – Public Liability Company
Plc’s are another type of company that can be formed. The pro’s and cons are discussed below.
Increased Regulatory Requirements – Generally, there is more regulation when it comes to the running of a PLC. PLC’s need a minimum of two directors, unlike a limited company that only requires one.
A trading certificate must be obtained from companies house before the company can trade, this is not required for a limited company.
Annual General Meetings (AGM’s) must be held where all members have a say in the running of the company. In limited companies and partnerships, decisions can be made easily by majority vote.
Additional restriction on PLC’s share capital also exist.
Stricter rules apply concerning any loans to directors.
More Susceptible to Hostile Takeovers – With shares being freely available, large volumes of shares can be acquired before a takeover bid is announced.Control and Ownership Issues – It can be extremely difficult to maintain control of a PLC. The original directors can lose control easily and spend lots of time managing the expectations of shareholders.
Raising Capital – Raising capital with a PLC is the key benefit to this type of company structure.
The PLC can sell its shares to the public and so, anyone can invest in it.
The volume of money that can be raised by the sale of shares by a PLC is typically much higher than the funds that can be raised by the sale of shares in a limited company.
Business Profile and Public Confidence – PLC’s can possess great public confidence as the suffix ‘Plc’ can be seen as a prestigious accolade.
As Plc’s are often under microscopic scrutiny by the press and media channels, shrewd senior management teams can leverage this ‘free advertising’ for their PR benefit.Share Transfer – Shares in a Plc are easily transferred sold and bought, however, there has to be a desire to acquire and or sell them.
Now that we have looked at the different types of legal structure, it makes sense that we investigate ways to access finance and ease cash-flow.
Business Finance and Commercial Lending Services UK
All too often the motivator for starting a company is either being made redundant, losing confidence in your senior management team and/or colleagues or the belief that you can do things better by yourself.
Let’s be realistic, life happens.
Sometimes, a period of time may pass between your last period of stable employment and the decision to start a business.
It can be all too frequent of an occurrence that either due to working on a low income for a period of time as an employee or your main source of income has been restricted due to unstable employment or short tenure work contracts that this can lead to personal debt problems.
Bad credit can make it difficult to gain access to traditional Business Start-up Loans and business funding opportunities that you may believe are the only way to get your business ideas off the floor but this isn’t the only option available.
You really can start a company without a business loan.
Invoice factoring services help business owners release the money tied up in unpaid customer invoices, so, if your business is viable, and you can secure customers you can invoice then it may be possible to use this form of finance to get your business off the mark.
Start Up Business Loans
Hamilton Wood & Company exists to help the wider business community gain access to the finance and funding opportunities it needs to make business ideas happen. In doing so this will ultimately contribute to the strength and stability of the UK’s economy (especially post-Brexit).
Any potential start-up should proceed with caution when it comes to considering start-up loans. Don’t just take the first offer that comes along especially if your credit rating isn’t particularly great.
When looking for start-up business loans make sure you focus on the R.A.P.R. % offered as this will represent the total cost of the loan. Generally the lower the APR, the cheaper the cost of borrowing.
Make sure you understand full the cost of borrowing because saddling your company with too much debt from the get-go might not be the best options.
It’s not unheard of that some business owners with bad credit might consider short-term bridging loans to get things moving but bridging loans can be costly, especially if used for purposes other than for what they are intended which is in most cases intended to aid with property transactions.
For some business ideas where the business needs substantial investment in company assets (like machinery, or HGV’s etc.) before the business can start trading securing business start-up loans might be the only option available.
Hamilton Wood & Company provide access to a myriad of start-up loan options depending on your circumstances.
We provide access to low-rate Government Backed Personal Loans at a fantastic rate of just 6% APR that can be used to fuel your start-up providing you have a good credit rating.
If you have a credit rating that’s not the best, you will need to consider other funding options, however, depending on the intended size and scale of your business, it could be that you need to look at other investment options such as Crowd Funding or Equity Investment.
Crowd Funding is becoming an increasingly popular way to raise venture capital.
Crowd Funding works by obtaining small amounts of money but from large numbers of people. Raising finance via CrowdFunding is an extremely effective way to raise the start-up finance and funding you need.
There are different types of Crowd Funding to consider.
Peer-to-peer crowdfunding and equity CrowdFunding will need to be repaid and you will also need to provide full disclosure on your company and personal accounts.
Donation CrowdFunding does not always need to be re-paid but typically is only effective if you have a business idea that contributes to a community project, good cause, or charity.
Contact Hamilton Wood & Company if you need help raising finance via Crowd Funding.
Private Equity Investment
Equity investment is a fantastic way to raise finance for your business idea or business.
Equity investment might be more easily understood if you think of the BBC’s ‘Dragons Den’ show.
As a business owner or prospective business owner, you have to present your business pitch to a panel of potential investors and then negotiate appropriate share capital that the investors will hold within your business.
Your Business, the Next Steps
The Importance of Accountants in Business
So let’s now assume that you have managed to secure the money you need or you have started cashing in on unpaid customer invoices to ease your company finances via our invoice factoring services, now what?
Well, you’re definitely going to need the help of a reputable accountant and/or bookkeeper depending on the size of your business.
Having an experienced accountant on-board from the start will ensure that you can leverage every possible avenue to maximise your company profits.
You can make your accountants life much easier by helping out with the tracking of your company accounts in, and your accounts out. By doing this there is no mad-dash at your year-end which can mean your accountant is literally on the ropes when trying to save your company money.
By having a healthy open dialogue with your company accountant on a regular basis (maybe monthly or quarterly) then you can maximise opportunities for growth by working as a strategic team, rather than a required necessity.
To help ease the burden of work on your accountant, you could sign up to the UK’s leading accountancy platform Sage, to help provide the management team with the necessary management information to make the best financial decisions at the right times.
Now that you have a functioning business, you now need to scale-up to maximise profitability.
Website – It’s a given that any business in the 21st century needs to have a strong online presence.
Make sure your customers can find you for the services and products you supply online and be sure to check the pedigree of your chosen web developer.
A website that looks fantastic but doesn’t rank in the search engines is pointless.
We recommend using Knights Marketing Services, they will get you to the top of Google and other search engines and their services won’t break the bank.
Search Engine Optimisation (SEO) – SEO is the process of getting a website to the top of Google and other search engines. This means that if you sell blue widgets, your site appears when someone types blue widgets in Google.
Search Engine Marketing (SEM) – SEM normally refers to paid advertising or pay-per-click (PPC) advertising to appear at the top of the search engine results pages (SERP’s).
SEM can get costly very quickly although it can be an extremely effective way to generate sales opportunities.
Word-of-Mouth Referrals – If you can delight your customers by providing a fantastic service then why not encourage them to recommend your business to their peers?
You might want to provide a reward of some sorts for every new client they introduce to you which can be an introducers fee or an Amazon voucher.
Newsletters – Sending regular outbound communications to your clients and potential clients is a great way to generate new sales opportunities.
There are some really fantastic tools to help you create the best possible company newsletter including Mailstyler2 which is an HTML newsletter designer which is very simple to use when used in combination with mail senders like Sendinblue.
Business Development Managers (BDM’s) – Having a member of staff on board whose sole purpose is to focus on finding and closing new business is a great way to take your business to the next level. Be sure to set appropriate sales targets and reward them for a job well done.
We hope you have enjoyed reading our guide to setting up a business in the UK.
Starting a Business in the UK Need Not Be Daunting. The UK Government and Local Enterprise Agencies Exist to Help Your Business Succeed.
If you need help financing and funding any of your business ideas call our Funding Experts now on 0161 791 1401.
Simon is the Managing Director of Hamilton Wood & Company.
His interests are reading, astrology, martial arts, and siberian huskies.