Sources of finance

The financ­ing of your busi­ness is the most fun­da­men­tal aspect of its man­age­ment. Get the financ­ing right and you will have a healthy busi­ness, pos­i­tive cash flows and ulti­mate­ly a prof­itable enter­prise. The financ­ing can hap­pen at any stage of a business’s devel­op­ment. On com­mence­ment of your enter­prise you will need finance to start up and, lat­er on, finance to expand.

Finance can be obtained from many dif­fer­ent sources. Some are more obvi­ous and well-known than oth­ers. The fol­low­ing are just some of the means of finance that are open to you and with which we can help.

Bank loans and overdrafts

The first port of call that most peo­ple think about when try­ing to obtain finance is their own bank. Banks are very active in this mar­ket and seek out busi­ness­es to whom they can lend mon­ey. Of the two meth­ods of giv­ing you finance, the banks, espe­cial­ly in small and start-up sit­u­a­tions, invari­ably pre­fer to give you an over­draft or extend your lim­it rather than make a for­mal loan. Over­drafts are a very flex­i­ble form of finance which, with a healthy income in your busi­ness, can be paid off more quick­ly than a for­mal loan. If, dur­ing the peri­od you are financ­ing the over­draft, an invest­ment oppor­tu­ni­ty aris­es, then you could look to extend the options on your over­draft facil­i­ty to finance the project.

Many busi­ness­es appre­ci­ate the advan­tages of a fixed-term loan. They have the com­fort­ing knowl­edge that the reg­u­lar pay­ments to be made on the loan make cash flow fore­cast­ing and bud­get­ing more cer­tain. They also feel that, with a term loan, the bank is more com­mit­ted to their busi­ness for the whole term of the loan. An over­draft can be called in but, unless you are fail­ing to make pay­ments on your loan, the banks can­not take the finance away from you.

Many small­er loans will not require any secu­ri­ty but, if more sub­stan­tial amounts of mon­ey are required, then the bank will cer­tain­ly ask for some form of secu­ri­ty. It is com­mon for busi­ness own­ers to offer their own homes as secu­ri­ty although more risk-averse bor­row­ers may pre­fer not to do this. Any­one offer­ing their house as secu­ri­ty should con­sult with any co-own­ers so that they are ful­ly aware of the sit­u­a­tion and of any pos­si­ble con­se­quences.

Savings and friends

When com­menc­ing a new busi­ness, very often the ini­tial monies invest­ed will come from the individual’s per­son­al sav­ings. The ten­den­cy of busi­ness start-ups to approach rel­a­tives and friends to help finance the ven­ture is also a wide­spread prac­tice. You should make it clear to them that they should only invest amounts they can afford to lose. Show them your busi­ness plan and give them time to think it over. If they decide to invest in your busi­ness, always put the terms of any agree­ment in writ­ing.

Issue of shares

Anoth­er way of intro­duc­ing funds to your cor­po­rate busi­ness is to issue more shares. This is always a wel­come addi­tion to busi­ness funds and is also help­ful in giv­ing addi­tion­al strength to the company’s bal­ance sheet. How­ev­er, you need to con­sid­er where the finance is com­ing from to sub­scribe for the new shares. If the orig­i­nal pro­pri­etor of the busi­ness wish­es to sub­scribe for these shares, then he or she may have to bor­row mon­ey in a sim­i­lar way to that dis­cussed ear­li­er. Typ­i­cal­ly, how­ev­er, share­hold­ers in this posi­tion are often at the lim­it of funds that they can bor­row. There­fore, it may be nec­es­sary to have a third par­ty buy those shares. This may mean a loss of either con­trol or influ­ence on how the busi­ness is run. An issue of shares in this sit­u­a­tion can be a very dif­fi­cult deci­sion to make.

Venture capital

Approach­ing ven­ture cap­i­tal hous­es for finance will also mean an issue of new shares. The advan­tage of going to such insti­tu­tions is the amount of cap­i­tal they can intro­duce into the busi­ness. Because of the size of their invest­ment, you can expect them to want a seat on your Board. They will also make avail­able their busi­ness exper­tise which will help to strength­en your busi­ness, although inevitably this will come with an addi­tion­al pres­sure for growth and prof­its.

On a small­er scale, the gov­ern­ment has intro­duced var­i­ous tax-effi­cient schemes for entre­pre­neurs to invest in grow­ing busi­ness­es. The cur­rent schemes avail­able are called the Enter­prise Invest­ment Scheme (EIS), Seed Enter­prise Invest­ment Scheme (SEIS) and Ven­ture Cap­i­tal Trusts (VCT). We have sep­a­rate fact­sheets pro­vid­ing details on these areas.

The SEIS is designed to help small, ear­ly-stage com­pa­nies to raise equi­ty finance by offer­ing a range of tax reliefs to indi­vid­ual investors who pur­chase new shares in those com­pa­nies. It com­ple­ments the EIS which offers tax reliefs to investors in high­er-risk small com­pa­nies. The SEIS is intend­ed to recog­nise the par­tic­u­lar dif­fi­cul­ties which very ear­ly stage com­pa­nies face in attract­ing invest­ment, by offer­ing tax relief at a high­er rate than that offered by the EIS.

Retained earnings and drawings

Since ulti­mate­ly the well-being of a busi­ness is con­nect­ed with the cash flow of that enter­prise, if a pro­pri­etor would like more liq­uid­i­ty, then it is some­times nec­es­sary to re-exam­ine the amount of mon­ey they are with­draw­ing from the busi­ness for their per­son­al needs. In this way, addi­tion­al funds earned by the busi­ness can be retained for future use.

Other sources of finance

Oth­er pos­si­ble sources of finance are out­lined below:

Fac­tor­ing

Fac­tor­ing pro­vides you with finance against invoic­es that your cus­tomers have not yet paid. Typ­i­cal­ly you can receive up to 85% of the val­ue of the invoice imme­di­ate­ly and the bal­ance (less costs) when the cus­tomer pays.

Hire Pur­chase (HP)

This is used to finance the pur­chase of equip­ment. Your busi­ness buys the equip­ment but pay­ments of cap­i­tal and inter­est are spread over an agreed peri­od.

Leas­ing

This is a method of financ­ing equip­ment you do not need to own. It is often used for vehi­cle finance. The equip­ment is rent­ed rather than owned and the rental pay­ments spread over sev­er­al years. There can also be the option to fix main­te­nance costs as part of the agree­ment (con­tract hire).

Matching

It makes sense to match the finance you are seek­ing to the pur­pose for which it will be used.