How to finance your business
Whether your client is just starting out in their business venture, looking to reboot their existing business or planning to diversify, it’s likely they will need to raise funds. This short guide will help you introduce them to some of the options available.
First things first
Business owners may need to raise capital for a whole host of reasons. The first things to ascertain from your client are:
- What point the business is at in its growth? For example, is it a start-up, profitable and looking to expand or in a recovery process?
- What is the money required for? For example, is it to expand into new markets or simply to sustain current levels of activity?
The British Business Bank Finance Guide has a handy tool which will offer up various options available based on the answers to these questions.
Funding options
Here are some of the most common ways to raise finance, as well as a few alternative options.
Bank loans and overdrafts
Loans are often secured by a charge over assets and arranged for a set period with set repayment dates and fixed or variable interest rates. But, be aware that conditions are often attached to the loan that can trigger a demand for immediate repayment if they are not met.
If your client is looking for small scale, short term cash, an agreed overdraft could provide the flexibility they need, but the interest rate may be higher than for an agreed loan if they’re using it over a longer term.
Credit Unions & Community Development Finance Associations
Credit Unions operate on a not-for-profit basis to support local individuals and businesses, so they will often be able to provide good interest rates for borrowing small amounts. In order to borrow your client will need to be a member of the Credit Union and often have an agreed amount in savings for around three months before borrowing. Find a local Credit Union.
Community Development Finance Associations (CDFAs) operate in a similar way to Credit Unions, using the money saved by members of the local community and recycling it to provide affordable finance. Visit findingfinance.org.uk for details of local lenders and how to access responsible finance.
Equity finance
To generate finance, businesses can offer up shares to investors, whether they are friends and family or a private investor. Organisations such as Business Angels can provide financing of up to £2 million and they can often also offer advice on how to make the business more profitable.
Business owners will often need to give up some autonomy over the running of the business when selling shares.
Government venture capital schemes
The government offers four venture capital schemes. The most commonly used are the start-up Seed Enterprise Investment Scheme (SEIS) and the Enterprise Investment Scheme (EIS) for more established businesses. Both provide finance for businesses by offering investors tax reliefs on the shares they buy in a company.
ICAEW Member Tasnim Mustafa from Barnes & Scott provides some insights into how to effectively advise on these schemes in this article.
Crowdfunding and peer-to-peer lending
The internet allows businesses to seek funding from like-minded individuals. This works particularly well if you are providing a product or service that captures the interest of a group of people, who will then club together to invest. Your client can raise funds in exchange for shares in the business, a reward (such as a product that wouldn’t be available otherwise) or as a charitable donation.
With peer-to-peer lending, lenders place their money on a platform where it is then lent to lots of different borrowers as many small loans. Borrowers can make up the loan amount they want from many different pots. Borrowers then repay their loans through the platform with interest, which the lenders then collect. Find out more about peer-to-peer lending.
Invoice factoring and discounting
Invoicing factoring and discounting both work on the basis of short-term borrowing against your outstanding invoices (usually around 80-90% of your invoice value). This can be a good option to ease cash flow issues and can offer better interest rates than bank borrowing.
With invoice factoring a third party finance company chases your debtors, which means your customers will be aware that you are working with a factor, but interest rates are generally better than with invoice discounting, where you remain responsible for collecting payments from your debtors. Invoice discounting is more readily available to businesses with turnovers over 100,000 and with a positive net worth on their balance sheets.
Additional finance options are available specifically for start-ups and businesses looking to grow.