Raising finance for your business

In October 2015, the number of UK businesses hit a record 5.4 million with over £1 trillion for the economy now being generated by small and medium-sized firms. Add to that an economy which has just entered its eleventh consecutive quarter of growth and there is clearly a thirst for business in Britain which shows no sign of being quenched.

If you’re currently in the process of writing your own business plan, you’ll have toiled over the finance you require. All businesses need some form of start-up capital, the thought of approaching a bank for a loan can be intimidating.

Happily, you have options. Lots of them. I’ve picked 5 finance options for your business which will provide the best backing for your new venture.

Bootstrapping

Often described as one of the most inexpensive ways for new businesses to gain financing, bootstrapping is likely to be your first port of call. Principally, it means using your own money to finance your business and get it off the ground.

Bootstrap finance can result in one of the most important discoveries any business owner will make; if you keep on top of and better organise your finances, you will likely find capital with which you can invest and build the business; the answer might be sitting right under your nose. Here’s some common bootstrapping methods:

  • Friends and family. If you can, ask those close to you. They know you, you know them and you may find they would be delighted to help finance your new venture.
  • Personal assets. Cash resources, credit cards – what have you got immediately to hand that would mean less reliance on outsiders?
  • Co-founders. If you’re going into business with someone, remember it is a joint venture. If you’ve exhausted your resources, have a frank and honest conversation with your partner. What can they bring to the table?

Traditional bank loans

Following the credit crunch of 2008, it would be easy to think bank managers will be less than generous with lending capital to new businesses. This really isn’t the case, but you need to prepare yourself before heading to your local branch.

That means writing a business plan. If the thought of it fills you with dread, it is worth employing an accountant who will help you and attend bank interviews if you ask.

  • Purpose of the loan – be crystal clear on the use of the loan. Write a business plan which shows your experience, your target market, products/services and exactly where you’ll be spending every penny.
  • Your stake – banks rarely lend 100%. They will feel uncomfortable if they (who have no day-to-day control of the business) are taking the lion’s share of risk. Just in the way you need a deposit to buy a house, a bank will expect to see you have an investment in the business and may ask you to sign an undertaking not to withdraw it while they are still lending.
  • Repayment – demonstrate that you can repay the loan by detailing your projected revenue and cash flow in your business plan. The bank will want to ensure you have thought it through thoroughly and will have enough cash to survive. They will need you to demonstrate the business will be able to pay all its creditors, not just the bank.
  • If it goes wrong – Nobody goes into business expecting to fail but, up to 50% of new-starts don’t last 5 years. To reduce risk for the bank it will usually demand some form of security for the loan (a property, for example).

Asset finance

If you’re familiar with hire purchase and leasing, you’re on your way to understanding asset finance. Put simply, it is a way of financing your venture by obtaining the equipment you need to grow, usually by spreading the cost of the kit over an agreed period of time. Also, this type of finance can be used for a range of “capital items” or fixed assets including plant, equipment, vehicles, IT equipment and even far more specialist items like marine vessels and aircraft.

Invoice finance

This is suitable for B2B companies where they can borrow against the value of work completed and invoiced. The two main products are factoring and  invoice discounting although there are other hybrid services. It enables businesses to draw funds against sales invoices, before receiving of remittance from the customer. Done correctly, it’ll improve your cash flow and working capital. As a result, this type of finance is ideal for expanding businesses including new-starts.

Crowdfunding & Peer-to-Peer Lending

Perhaps one of the most exciting and modern forms of financing, crowdfunding and peer-to-peer lending are methods by which businesses can raise capital for new ventures by seeking investment from the general public. As a result, there are numerous specialists evolving all the time. Some offer to take a share of your business whilst others will lend to the business. In the same way that banks need to see an investment from you investors and lenders will want to see that you have the confidence in your business and own ability to invest some of your own money.

Kickstarter is not that far off being a household name, and for good reason – crowdfunding can be an incredibly powerful way to build not just startup capital, but a lasting brand. It worked for Pebble, after all.

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