Small Business Finance
Without enough proper business financing, your new business will not be able to buy stock, rent premises, advertise or take on
staff. Many people need to raise business financing to fund their new venture. The vast majority of business startups turn to their
bank for funding, but there are several other ways to raise the money you need. There are three main types of funding:
- loans
- share capital (from a venture capitalist, business angel, or friends and family)
- grants
One of the biggest challenges for a small business is choosing the most suitable
method of finance from the many options available. In a survey commissioned by the
government's Small Business Service, more than 20 per cent of respondents said they
had encountered difficulties or faced obstacles sourcing finance.
So what are the different methods of finance and how do they compare?
Apart from personal savings, banks are still the most common source of business finance.
Banks will usually only lend money against security, such as assets like property. Sometimes,
banks will also loan against inventory or orders received, but as this possesses more risk for them, it tends to be a more expensive way of
borrowing cash.
Banks are generally are very focused on what will actually materialise, and less focused on the "blue sky" potential. The
criteria and terms for lending to small businesses vary from bank to bank so it is worth shopping around until you find someone that is right
for you.
A managing director of an electrical retail, service and repair business used a commercial mortgage to transform his
business. The company sells a vast amount of white goods but there just wasn't the space at the shop to store it
all. As a result they were renting space at a number of different units, but this was expensive and difficult to manage.
They needed a loan to purchase a large industrial unit where they could store all
their stock and base their administration department. They decided to approach their
bank rather than try any other type of finance because they had been working with
them for years and they knew the business very well.
They approved a £100,000 commercial mortgage, which was used to purchase an out
of town site. The new location is great because it allows them to hold a larger
quantity of stock and distribute it quicker to their customers.
Another method of raising capital is personal loans, but be warned, that unlike
business loans, this type of finance makes the borrower personally liable! If
payments are not kept up, the assets against which the loan is secured, which in
many cases will be a home, may be lost.
Caution should also be applied when asking friends and relatives for money.
Asking friends or relatives for money can be right in some circumstances but it must
always be done properly and professionally. There must be written agreements
regarding the terms of the loan, timing of payments and the limit of involvement.
Another source of funding is Venture Capital (VC). But
despite some VC firms getting involved with start-ups, most prefer to back businesses with a history and
track record of successful trading.
The biggest issues to bear in mind with venture capital firms is that they will
focus on making deals which will provide an exit, typically with a very high return
for their investment, in a fixed time, usually five years.
Because of the high growth they will expect, they will want to see a strong and
well-balanced management team able to manage the growth. Equity will often be part
of the deal and the legal work will be rigorous in advance of the deal itself.
Floating a company on a publicly traded exchange is another method of finance,
but it is not appropriate for most small companies.
Many firms aspire to this as a sign of success, but the demands placed on both
the company and the management team are very significant and require massive
support from specialist advisors.
The links on this page will take you to more information on the business financing options available, helping you decide which is the best
one to suit your business financing needs.
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