Raising finance for a business
It states the obvious to say that money makes the world go round, as it does equally to say that how you find finance for your business is going to be critical to its success. However, raising money still remains a major challenge for thousands upon thousands of startups and whether you are looking to start a new business or need money to grow, there are various options to consider.
Overdrafts are credit facilities that are set and agreed between you and your bank. Their limit needs to be agreed in advance with the bank and interest is typically charged on the amount of money received as part of an overdraft facility. Arrangement or renewal fees to set up and maintain overdrafts can also be charged.
The benefits of an overdraft are it can provide a flexible way to cover short term costs and unforeseen business expenses but they shouldn’t be considered a long term source of finance. Banks can also see their long term use as a sign that a company is in financial difficulty.
If anything can be described as the mainstay of funding for businesses it is the bank loan. Bank loans are taken out for a fixed term, and with an agreed interest rate, therefore businesses can easily plan for the monthly payments which are required to repay it. It is possible that repayment terms and interest rates are negotiable however banks will now typically request some form of collateral against the loan to provide additional security.
Each time you apply for a loan the application will show up on your credit file. It is important therefore that you prepare your application with due care and attention backing it up with a solid business plan and stating the clear and legitimate reasons for asking for the loan. Following the financial crisis banks have maintained a cautious approach to lending and those companies perceived as a high risk can be refused a loan.
Friends and family can be an additional source of money for loans if they are able financially and willing to provide funds for your business. It is important however that due to the closeness of the relationship the basics of drawing up an agreement between all concerned is not overlooked so that everyone knows where they stand. Things don’t always go to plan in business and consequently it is important to put things in place which minimise the potential for upset between you and those closest to you.
Grants and Government support
A grant can be an excellent source of cheap finance for a business. It is most frequently made available by the Government, local councils or charities, and the amount awarded does not need to be re-payed. On occasions though the award of a grant will come with the requirement for a company to match the amount of money awarded or alternatively cover part of the cost of a project it is intended to fund.
Because it is non-repayable however there is always a large amount of competition for grants and they are usually only offered to specific sectors or for specific projects.
The positive news though is that due to the financial crisis of recent times, and the difficulties it raised for businesses trying to find finance, a number of Government lending schemes are now available to eligible businesses. These include:
- The Enterprise Finance Guarantee – This scheme is available to UK-based businesses requesting a loan of between £1,000 and £1 million and under it the Government will underwrite 75% of all qualifying loans provided by commercial lenders to what are considered ‘viable’ small and medium sized enterprises (SMEs). A number of eligibility criteria and conditions apply and further details are available at www.gov.uk.
- Regional Growth Fund – this fund is scheduled to operate until 2016 and under it eligible businesses using private sector investment can bid for a share of the £2.6bn fund.
- Start up loan scheme for young entrepreneurs – Under this scheme young entrepreneurs, who are between the ages of 18 and 30, living in England, and wanting to start a new business can apply for a loan.
There are numerous other schemes and grants which now exist and to search for those in your sector visit www.gov.uk/business-finance-support-finder.
An alternative to loans and grants is to consider selling off part of your business in return for funding from an interested investor. Investors come from all walks of life and could be a private equity company, a larger company operating in the same sector or simply a wealthy individual. In addition to money, investors can also bring their own business skills to the table which can often be as important to the success of your company.
Another advantage to this type of finance is that there are no monthly repayments which include interest. This type of financing though also means relinquishing control and investors will often expect to be consulted before important management decisions are made.
It will also mean any profit, or loss, the business makes will be shared with the investor.
Debt factoring and invoice discounting
For companies which are more established ‘factoring’ is another way to raise finance. This involves you selling the debt of an amount of unpaid invoices and then paying interest and/or a fee on them. The buyer of the unpaid invoices will then collect the outstanding amounts owed on the invoices themselves.
Similarly, invoice discounting provides a way of borrowing money using the unpaid invoices owed to your company, although again a fee will be charged. As your invoices are paid, the amount you owe to the lender goes down.
With cash flow being so critical in business these types of financing are often seen as a good way to release the money tied up in unpaid invoices to enable it to be used by the business.
Asset finance is another potential way of helping cash flow. Leasing office equipment for example means your company doesn’t have to spend a large amount upfront in one lump sum. You should note however that on occasion the monthly leasing instalments can end up being more expensive than buying the asset outright.
On the plus side leasing can let you get better equipment, and it can be upgraded easily when the initial contract comes to an end.
Hire purchase agreements offer another similar option to those not wanting to pay for business assets in full and up front, and these agreements typically include an option to purchase the asset at the end of the initial period.
And don’t forget, the cost of qualifying business equipment is usually tax deductible!
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