Raising finance for a small business involves striking a balance between the various forms of funding to ensure that they are suitable for the business. There are several funding opportunities available for small businesses, ranging from a straight business loan secured against some form of collateral, to a business angel, or dragon if you like, willing to invest in your business in return for a share in it.
You have a number of options to choose from, and whether you choose one or a combination of alternatives depends on how much you need and what each source is willing to offer. Although it is possible to use a number of different sources, it is important that you are crystal clear with each exactly what you want from the investment or loan, and also the repayments terms involved or the equity share required by the investor.
When determining the form of business finance that is most suitable for you, you should take into consideration not only the sources of finance, and how much you want to secure, but also what you intend to do with it.
Prior to seeking money it is important that you have a proper business plan prepared in order that that you can clearly communicate your ideas for the business: your objectives and how you intend to achieve them. A business plan is also useful in showing you where your weaknesses lie, and enables you to address these before requesting finance.
Try and maintain a good share capital, if relevant, without exposing yourself to excessive debt. Here are some possible options to consider if you need money for your business.
Friends and Family
Some people have sufficient interest in their business from friends and family to borrow all the money needed from them in return for an interest in the company or even under a straight repayment with interest. This is generally a good option if the sum required is not large, although failure could be disastrous for your relationship with them. It is a good idea to put your agreement with them in writing.
Loans
There are several different types of loan available for small businesses, secured over medium and longer terms on assets and under various terms of interest. Security can involve the asset being purchased, or another asset owned by you or the business under a chattel mortgage deal. With these the money is secured either on the equipment being purchased, or another asset owned by the company.
Venture Capital
Venture capital is a means of financing a business by offering shares in return for capital, and largely intended for fast growing businesses with large profit potential in the future. There are a number of venture capital funds to choose from in the UK, but only go for this type of finance if you are prepared to offer a large share in the business.
Angels and Dragons
Why not try to find an angel – or even a dragon? These are investors that are offering risk capital without security, usually in return for a share in the company. The British Business Angels Association offer further information, although you could try Messrs. Bannatyn, Caan and company on Dragon’s Den. An angel will typically help you to promote the business and secure customers for your product.
Grants
There may be government or local authority grants available, or even grants from the European Union and development agencies for setting up your business in specific development areas. Grants are available for acquiring equipment and other assets or for offering jobs and training. There are a large number of Trade and Industry initiatives you could also check out.
Other Funding Sources
Other sources include a straight bank overdraft secured on assets, available for short-term use, or mezzanine debt, offered where you have very little security left. The rate of interest available is from 4% – 8% higher than the base rate. Your loan might be partially secured on any equity you have left. This is advised only as a last resort, and should not be your first port of call.
Leasing Options
There are also various lease arrangements possible for vehicles and plant, and many enable you to keep the asset at the end of the agreement, or to do so after making a small payment.
The two fundamental ways of raising finance for a small business involve either debt or equity. Unlike debt, where interest payments will be required and capital repayments made, offering equity or shares to investors involves a higher degree of risk-taking, and the investors only benefit when the business does well. It is therefore in their interests to help the business.
Accountants will likely be called in to check out your business plan, so be sure to have this professionally prepared. You should be fully aware of your repayment terms and the terms of agreement of any stocks or shares that are offered for the finance. As long as you take the advice of a professional accountant and financier you should be successful in securing finance for your small business under terms that are acceptable to you.
