Most people in the UK will, at one time or another have a business venture that they wish to pursue in one way or another and to differing scales. For some, it may be a small side project; something you are passionate about that then becomes a small business venture. This may take the form of artwork that is then sold or cakes that are made to order and then sold at a small profit.
For others, a new business venture is something on a larger scale, for example, quitting a full-time job to then pursue a full-time business venture. This could be starting a web design business, changing direction in your career or otherwise. However, a perpetual problem for most is how to fund a new business. Most businesses will need money to get them off the ground and not everyone will have access to potentially a few thousand pounds to do so.
Options for acquiring that much-needed business funding could include applying for a second charge mortgage (effectively a mortgage on top of your existing mortgage), undertaking some freelance work to initially secure some money or taking a short term loan to inject the necessary funds.
Second charge mortgages
Most people will be aware of what a mortgage is; what the process of getting a mortgage entails and how it all works. A mortgage is simply a (usually significant) loan, secured against a portion of the value [equity] of your property. The bank or lender will provide a borrower with the money required up front, which is then repaid with interest over a number of years.
A second charge mortgage, also known as a second mortgage is in practice, another mortgage on top of your existing mortgage. These types of mortgages are often useful to people who need some additional money, but who for a range of reasons are unable to remortgage.
For example, a homeowner may have a property worth £500,000, with an outstanding mortgage of £200,000, for which they have paid off £100,000 and for which they are already making repayments. However, setting up a new business venture then need an additional £100,000. It may be the case that their existing mortgage lender has them ‘locked in’ for a minimum period of time, meaning that if they remortgage they will face penalty fees.
A second mortgage lender however, may be able to provide the additional money needed.
How do they work?
The second mortgage provider would lend the £100,000 required, secured against the equity of the property. As a second mortgage, the lender would have to agree terms with the primary lender as well as the borrower. Hence, if the borrower defaults on mortgage repayments, the first charge provider gets priority with the second mortgage provider coming second.
If the primary mortgage is cleared first, the borrower may remortgage their property to repay the second charge mortgage, repaying a single mortgage at a lower rate. Alternatively, if the business funded by the second mortgage generates enough profit, this could also be used to clear the second charge mortgage.
Other means of funding a fledgling business
Although a second mortgage is a great way in which to fund the starting up of a new business, particularly if a significant amount of money (tens or even hundreds of thousands of pounds) is required. However, for many people, it is a case of needing a few hundred or perhaps a few thousand pounds, rather than tens or hundreds of thousands.
In such cases, a second mortgage lender is unlikely to fund a loan, with it being too small an amount. However, the prospective borrower may wish to undertake other means of acquiring the funds necessary:
Freelance work – It is no secret that freelance work in most industries can pay very well. It may therefore be worthwhile to sign up with a recruiter and an umbrella company to get yourself set up for freelance employment and the relevant tax arrangements. Signing up with an umbrella company will give you peace of mind that the administration and paperwork is all taken care of, allowing you to focus on getting the work you need to completed, to get on the path to funding your business venture.
Short term loans – Short term loans can include the likes of payday, instalment, guarantor, logbook and other types of short term finance. These loans do charge more interest than typical loans, but they can provide the money you need (usually up to a few thousand pounds) within minutes of acceptance. Additionally, many lenders have flexible repayment schedules, making it a bit easier to repay the loan.