Financing Your Business
Whether you are starting a new business or need to raise capital to expand, there are several ways you can finance your business.
On this page we explore some of the options available to your business.
Don't forget we have established contacts with many providers of finance and can assist you in sourcing any funds you may need.
Bank overdrafts agreed by your bank can offer a flexible way to cover short-term outgoings and unforeseen business expenses.
Overdraft limits need to be agreed in advance and interest at a pre-notified rate is charged on any overdrawn amount.
Other charges are usually payable too, such as arrangement or renewal fees.
Bank overdrafts should not be used as a long term source of finance, and continued use may prompt your bank to question if you are in financial difficulty.
Traditionally loans have been the usual source of funding for most businesses.
Bank loans are taken out for a fixed term at interest rates agreed in advance, so it is easy to plan the monthly repayments into your financial budgets.
Repayment terms and interest rates are sometimes negotiable, although most banks ask for collateral or personal guaranteed as an additional form of security.
Borrowing funds from friends or family can also be an option if they are willing to take the risk of supporting your business venture. If they are, it's advisable to prepare a legally binding agreement to make sure everyone understands the terms and avoid any disputes down the line.
Every formal loan application will show up on your credit file and as banks are often cautious about lending make sure your business plan makes sense and your reasons for borrowing are legitimate. If you are a considered high risk to the bank, you may be refused the loan and this will be noted on your credit file, making it doubly difficult if you subsequently apply again to a different lender.
You might be able to apply for a grant or other type of support.
Grants are usually provided by local councils, the government and sometimes charities, and can be a useful and often free form of financing.
Grants and similar subsidies are usually non-repayable, but because of this are highly sought-after, so you will be competing against other businesses chasing the same funding.
Government grants are usually only offered to businesses operating in specific sectors and for specific projects. It is also often a condition of receiving a grant that you cover part of the cost of your project, or match the funds granted to you.
This involves selling part of your stake in the business to an interested investor.
Only limited companies can sell shares, so sole traders and partnerships are not able to use investment finance as a funding source.
If you sell a share of your business to an investor, any profit the business makes is shared with your investor.
Advantages of investment finance mean are that you are not charged interest and there are no monthly repayments. Investors may also bring new and varied skills into your business.
The downside is that most investors will expect to be consulted before any management decisions are made, which could lead to disagreements over the potential direction of your business.
The popular TV program Dragon's Den gives you an idea of what may be possible, but also an insight into the potential problems of working with strong characters as your investors. We are still waiting for our first client to appear on the program, although we do have at least one who have had preliminary discussions!
Factoring and Invoice Discounting
Factoring involves selling your unpaid invoices to a third party factoring company and then paying interest and/or a fee on them.
The factoring company then collect the debt themselves.
Invoice discounting is a different process where, for a fee, you can borrow money against any unpaid invoices owed to your company. As your invoices are paid by your customers the amount you owe to the invoice discounting lender decreases.
Either of these forms of finance can release cash tied up in unpaid invoices and help with the cash flow of your business.
By leasing equipment instead of buying it you can avoid spending a large amount of money in one lump sum.
This can help your cash flow although it should be pointed out that in some cases the monthly leasing instalments can be more expensive than buying the asset outright.
Leasing can give you access to a high standard of equipment which you wouldn't have otherwise been able to afford, and leased assets can be easily upgraded when contracts end.
Hire purchase agreements are another way to buy business assets without having to pay for them in full up-front, and these agreements will include an option to purchase at the end of an initial period.