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In a recent report carried out by Moneywise, the average amount of capital required to start a small business in the UK was £27,520. The most expensive areas to start a business were surrounding the Greater Manchester area (£44,733) and the least costly around Newcastle (£17,008). The report surveyed companies across industries including retail, construction, online, property, fashion and more.

Of the 850 small and medium-sized businesses (SMEs) reviewed, 42% of the founders began their business using their own savings and 24% used funds from family and friends. As much as 33% of participants spoke of the difficulty in accessing mainstream finance and said banks were not ‘business-friendly.'

One source of finance that is commonly overlooked is guarantor lending. This involves a customer applying for business finance and having an extra person they know to be involved in the loan agreement. This is typically a family member, friend or co-owner who agrees to cover the cost of the loan if the main borrower defaults.

How does a guarantor loan help the business owner?

Guarantor lending gives an opportunity to those that may have been turned down by traditional banks and other common sources of finance. Using the additional person to guarantee their loan, they are able to benefit from the creditworthiness of that individual to acquire the funds they need. For the lender, they appreciate having the extra security which makes it easier to recover the funds down the road.

For those entrepreneurs that have been turned down for business finance because of their credit score, not only can they leverage off their guarantor's credit rating, but paying back their loan every month on time will cause their credit score to improve and this will allow them to access more affordable finance in the future.

Also, if we consider that of around a quarter of people surveyed, received funding from family and friends, being a guarantor does not require any money upfront. The guarantor is only called upon if the loan falls into arrears - so for those parents on the fence about investing in their child's business, they could still do them a favour by being their guarantor.

What are the terms of the loan?

Borrowers can drawdown up to £15,000 which is repaid in equal monthly instalments over 12 to 72 months. By having a loan duration that can last up to seven years, it gives the business owner some flexibility to repay their loan and they can always repay early if they are in a position to do so. Of course, not all borrowers will be able to borrow the maximum amount, suggesting that guarantor lending could make up part of your seed capital and the remainder could be savings or from Mum or Dad.

The average cost of a guarantor loan ranges from 39.9% to 59.9% representative APR depending on the lender (Source: GuarantorLoanComparison). The rate advertised is ‘representative' meaning that it is the rate offered to at least 51% of successful applicants that are funded and this works out to around 0.1% per day.