Funding For Your Business

Raising Finance for a start up business or securing expansion finance for an established business can be an overwhelming experience.

There are various sources of external finance available such as relatively simple overdraft facilities or European Grant funding programs which require detailed applications. Although taking on an additional financial commitment can be daunting, the rewards for the growth of your business can be substantial.

This article details all of the various options open to you should you want to raise finance for the growth of your business.

OVERDRAFTS

Overdrafts are one of the most common short-term sources of finance available. They provide a simple and effective way of financing the growth of your business. If your business has a good credit history, your bank will require little information from you to secure a short-term overdraft. Once they have the confidence that you are able to pay it back, the additional borrowing can be instant. It is important that you use the overdraft facility wisely to minimize the cost. Charges for exceeding overdraft limits can be substantial. Use it for seasonal fluctuations in sales, not long term financing.

Why overdrafts?

They are simple and relatively easy to set up.

You only pay interest on the amount you use.

Pitfalls

In most circumstances, the bank can demand repayment at any time.

The overdraft may have to be renegotiated approximately every six months

Before you approach the bank, put together a proposed cashflow forecast for 12 months to ensure your needs are accurate and that you are able to keep within the limits.

LOANS

Business loans will provide you with longer-term finance, usually up to 8 years. You will probably need some form of business plan to present to the bank or loan company in order to inform them of the viability of the business and your ability to make the extra payments . They will want to see a proposed cashflow, a profit and loss account and any previous financial accounts you have available. You will also have to prove that you are investing the additional borrowing into the business.

Why loans?

You can normally secure a fixed rate and spread the payments over a term that suits you
You may be eligible for a loan such as "Women in Business" or "Small Firms Loan Guarantee Scheme" which provide lower interest rates or special dispensation should you not be able to keep up with repayments.

Pitfalls

If you fail to make a payment on a loan, you will acquire a default status which will affect your business credit score.
You may need to provide personal security for the loan

GRANTS

There are currently hundreds of Government, Council and European grants available for small businesses. The grants are allocated to businesses to meet political or economical objectives and most require no repayment. Many of the funding programs are not promoted as the demand would outweigh the supply. Grants will typically be available under the following criteria:

If you have a clear project in mind such as office refurbishment or staff recruitment.

If you are able to part-finance the project yourself.

If the project is planned in the future, not already undertaken.

If you have a business plan.

Grants are normally allocated according to sector or location. Some regeneration areas are awarded finance to assist businesses, while other funds are allocated for specific industries.

Local, small value grants normally have a simple application procedure while high value grants will require detailed applications. In most cases you will be expected to have a sound business plan and financial forecast.

HIRING OR LEASING

Hiring or leasing equipment can ease your cashflow by allowing you to spread costs and minimise capital expenditure. Equipment available for leasing can include vehicles, office equipment such as printers or technical equipment. You must ensure of course that the financing does not exceed the life of the equipment as this will result in negative equity. In addition, you can also upgrade equipment as new technology comes onto the market.

FACTORING

Factoring allows you to raise finance on outstanding invoices. This is not a short term fix for cash flow problems - factoring companies will require at least a 12 month contract and you will be required to factor all of your invoices during the contract period. You generate a clients' invoice and send it to the factoring company who will then pay you typically 80 - 85% of the invoice value. They will then collect the full invoice from the client, thereby retaining the balance as their fee. This can be a good system to use for cashflow purposes, but you will need to ensure your profit margins can afford to incur this loss.

INVOICE DISCOUNTING

Invoice Discounting works in a similar way to factoring. The difference is the customer has no knowledge that you are using an invoice discounting service. You distribute your invoices in the usual way and send a copy invoice to the Invoice Discounting company. You receive an agreed proportion of the invoice value from the invoice discounter immediately. When payment is received from the customer you are required to submit payment into a dedicated account managed by the invoice discounter. They will then settle the amount owing to you less fees and interest. The cost of this service is dependent upon your turnover and customer base but typical interest rates will be 1.5 - 3% above the Bank of England base rate.

BUSINESS ANGELS

If you are looking for a higher level of investment than the banks are willing to supply, you may consider sourcing a business angel. Business Angels are usually wealthy individuals with an interest in business who will provide capital in return for shares in your organization. They will often seek involvement in the business which limits the control you retain but they can also offer sound advice and many are entrepreneurs themselves and have experience of running a successful business. Business Angels will typically be looking to invest between £10,000 and £750,000.

VENTURE CAPITAL

Venture Capital or Private Equity finance is very similar to Business Angel finance. However, VC's are willing to invest much larger amounts of money. Venture capitalists are typically large organizations looking for opportunities to return around 30% of their investment per annum and will not be interested in investments of less than £250,000.

Whatever funding you select for your business, ensure that your ability to repay (if appropriate) is investigated before you make a final decision.

Kate Beever is an experienced business consultant specializing in providing advice to new startup businesses and experienced businesses with growth plans.

Kate runs two established businesses - http://www.getsetforbusiness.co.uk is an online business planning tool, membership and advice programme exclusively designed to assist those embarking on a new business venture.

The GetSet for Business planning tool provides sector focused business information and the facility to produce a bespoke and professional business plan. Each screen is dedicated to each and every area of starting a business with a full glossary of business terms, external sources of information, downloadable supporting documents and access to conference calls with high profile experts.

http://www.tradesolutions.org.uk provides advice and consultancy on all business related issues including Strategy, Market Analysis, Marketing and Sales, Operations and Human Resources. Typical services include proposing and/or implementing a marketing strategy, market research, business planning and searching for grant funding. We also take our service one step further and actually implement solutions or strategies if required. From start-up to established businesses, Trade Solutions can provide sound advice and measurable solutions to achieve objectives and help businesses achieve significant growth.

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