Businesses sometimes need additional finance to start, operate and grow.
There's a range of established ways to raise finance.
Each has its pros and cons, and some are better suited to some situations than others.
Here, we will guide you through the most common sources of funding, their features, and the circumstances they're best suited to.
There are three broad kinds of finance -
bank finance, equity finance and government grants.
Let's begin with bank finance.
Banks offer three kinds of finance - short-term, medium-term and long-term.
Short term finance is useful when your business needs a quick stop-gap.
You might need to cover the purchase of stock, so that you can meet a large order.
You might be a new business that requires money to cover you for the
first few months, before you start generating revenues.
There are three kinds of short-term finance - overdrafts, bridging finance, and invoice discounting and factoring.
An overdraft is linked to your business bank account and allows
you to withdraw more money than is currently deposited there.
It is a flexible source of capital for short-term needs, and simple to arrange with your bank.
Manage your overdraft carefully. There may be penalties if you
go over your agreed overdraft limit without speaking to your bank.
Your bank may stop payments to your suppliers if you consistently exceed your overdraft limit.
Good communication can prevent these problems.
Banks have a range of flexible options for funding your business. One of them is bridging finance,
which they can provide while you are waiting for grant checks or a drawdown
on a commercial loan. If you foresee such a shortfall, ask your bank if they can help you manage it.
There are other short-term finance options which are more complex, but can be useful in certain situations.
Invoice discounting is a kind of bridging finance that is secured against the value of your approved but as yet unpaid invoices.
Factoring goes one step further. The bank or another financier buys your invoices and collects payment from your customers.
These kinds of funding can carry risks that bank borrowing does not.
Speak to your bank to ensure that they're right for you.
Trade credits are not a form of bank funding, but they are a useful form of short-term financing.
Your suppliers may be willing to wait a short period before you pay their invoices.
They will state when you must pay - typically 28 days after delivery.
Let's look at finding funding over the medium-term.
You might want to buy a vehicle, or a new piece of equipment.
Business loans and higher purchase agreements can help to
fund these kinds of purchases, and are paid off over three to five years.
Business loan repayments are regular and straightforward, so you can plan and budget for them.
Interest rates often amount to less than those on an overdraft held for the same period.
You may also receive tax relief on the interest payments.
On the downside, you may have to come up with some of the money yourself.
This could be up to half of what you need.
It might be difficult to secure a business loan if you're a new venture with no track record.
You may have to provide a guarantee or security, such as your home or business assets,
which will be at risk if you don't meet your loan repayments.
You might buy a vehicle, or new equipment under a higher purchase agreement.
You pay an initial instalment and your bank pays the balance.
You then pay this back over time, plus interest.
Think carefully before entering a higher purchase agreement -
they are not ideal for things with high maintenance costs, or items that go out of date quickly.
On the upside, you can claim back any VAT you pay.
Long-term bank finance helps you raise the large sums required
for buying a business, premises, plant or machinery.
Commercial mortgages are usually for a amounts over £30,000, and are typically paid back over 25 to 30 years.
Your bank will usually require you to deposit at least 15 per cent of the purchase price.
They are flexible and affordable, but the bank will have a stake in your property
until the loan is fully repaid.
Your premises could be repossessed if you miss payments.
You will need to have your books in good order before you apply for commercial mortgage.
Your accounts for the past three years, your business plan and several references is standard.
The better your history, the more likely you are to be approved and pay a lower interest rate.
A fixed asset loan is like a commercial mortgage, but is used to
cover the costs of plant or machinery. The piece of equipment is used as
collateral and can be repossessed if you do not keep up your repayments.
Bank funding will not be available to everyone,
and may not be the best option, even for businesses that can access it.
Equity finance and government grants are alternatives.
Equity finance is a way of raising capital from external investors in return for a stake in your business.
That stake is equity - it represents the value of your business after its assets and liabilities have been considered.
Several kinds of equity finance are appropriate for small, private businesses -
venture capital, business angels ,the stock market and crowdfunding.
A venture capital firm is a business that invests in new businesses with high growth potential.
Business angels are individuals who invest in start-ups and
young companies with good growth prospects in exchange for a share of the company's equity.
The stock market allows investors to buy shares in your company,
which are then traded on the stock exchange.
This is typically an option for large companies that are prepared to take on the higher regulatory
requirements and scrutiny that public ownership entails.
Crowdfunding, on the other hand, allows many people to invest small amounts of money in your business at any stage in its growth.
This usually takes place on dedicated websites, known as crowdfunding platforms.
You create a profile for your business and use the platform's video hosting
and social networking tools to reach prospective investors.
You will need to set a funding target, and be prepared to pay back any money you have received if you do not reach this amount .
Each investor will expect to receive a reward for their contribution.
For example, early access to your product, or a financial return.
What you choose to offer is an important part of your pitch.
Crowdfunding is a fast way to raise money and a good option if
you're struggling to secure bank loans or other forms of funding.
If your business is new or expanding, you may be eligible for a business development grant from the government.
A grant is a sum of money offered to a business for a specific project and usually covers only part of the total costs.
You won't have to repay it, or give up shares in your business, as long as you adhere to any conditions.
Government grants usually attract many applicants, so be prepared to face strong competition and meet stringent eligibility criteria.
Here, we've outlined the most common sources of bank and equity finance available.
Whatever stage your business is at, there's a funding option available for you.
In fact, you're likely to use a combination of options as your business develops and grows.