Raising Business Finance

What type of finance, and who should you approach?

Business owners are more likely than not to have to source funding at some point in the development of their organisation.

Raising finance can be a minefield, but it is advisable to ask yourself two questions before you start – what type of finance is best suited to my business, and who should I approach for funding?

It may be that you do not need outside funding at all. Additional funding requires a commitment in terms of capital and interest payments, so take a look at the business and see if you can improve its working capital from within. Pay attention to stock and debtors and make sure that both are kept to a minimum. Analyse who long it takes to bill customers and collect debts and look at ways to reduce this time.

If there are times when you have a cash surplus, review your affairs and consider using these funds to generate additional income by investing in short term deposits.

Once you have looked at the feasibility of working capital from within and assumed an outcome that you will need external funding, you will need to impress lending organisations and for this you will need a well drawn up business plan. This should cover: your aims and objectives; details about the business including products, services and markets; your sales plan and strategy; and the financial position of the business, including cash flow forecasts and previous accounts.

Once the business plan is drawn up, speak to your accountant or business advisor about the forms of business funding available.

If you consider mainstream sources of funding, such as bank overdrafts, medium to long term loans and mortgages, check the interest rates and repayment terms carefully before you sign on the dotted line.

It maybe that you are considering funding for a specific project or piece of equipment. In these instances there are a number of options including leasing assets, hire purchase, outright purchase, debt factoring and invoice discounting. Each method of funding has its advantages and disadvantages, and in many cases there are tax implications to take into consideration. Speak to your accountant about the best option for your business.

There are other ways to raise money. You may qualify for a Government grant, concessionary loan or loan guarantee, especially if your business is in the manufacturing sector or creates new jobs, and other grants may be available at a regional or local level. You may also wish to raise finance by issuing additional shares in your business.

Whatever for of finance is used, the lender will always require some form of security. Levels of security can vary and you should avoid lenders that ask for unreasonable guarantees. Most bank loans and overdrafts are secured via a fixed charge over land and buildings with floating charges over other assets of the company such as stock and debtors.

If yours is a business with insufficient assets, you are likely to be asked for security in the form of personal guarantees. Be very careful when signing such guarantees because that can be difficult to amend at a later stage. Personal guarantees are best if they are limited by time or amount – unlimited guarantees are the most dangerous and should be avoided.

As with all important business decisions, seek the best professional advice you can afford before taking action.