Many businesses will need to raise funds at some time – either at the start-up stage, or to finance expansion. With ‘traditional’ credit still in short supply and the possibility of a ‘triple dip recession’ in 2013, here is an overview of the various options open to small businesses looking to raise funds.
Many businesses will have an overdraft facility with their bank – this adds short term flexibility to provide cashflow when you encounter late payers, or to cope with an unforeseen expense. With instant access, you won’t need to consult your bank manager if you keep within your pre-agreed overdraft limit.
Friends & Family
Most small businesses are started, and funded, by the owners, or by relations and friends of the owners. If you do decide to secure funding from people close to you, you should still ensure that you have a written agreement in place, to avoid uncomfortable situations further down the line.
Rather like personal loans, there are a vast number of providers of business loans. Loans can be unsecured or secured, and have variable or fixed rates of interest.
Securing business lending is not as easy as it was prior to the 2008 credit crunch, and the inflexibility of lenders when it comes to dealing with small businesses is notorious. The sceptical reaction to ‘Project Merlin’ (launched in February 2011), which aims to force the banks to lend, is a case in point.
Read more in our guide to small business loans.
This type of finance allows you to borrow against assets owned by the business. Leasing arrangements are essentially rental agreements with the finance company. The two main types are:
a) Direct Leasing, where the lender buys an asset from a company and the company “rents” it back from the lender.
b) Sale & Leaseback – Where a company sells an asset they already own, but still have access to the asset.
Specialist companies allow you to borrow against the value of invoices you have raised (but have yet to be settled). No other assets are required to secure invoice finance funding and you can typically receive up to 90% of the invoice value within 24 hours.
You can read more in our dedicated guide to Invoice Finance and Factoring.
Commercial mortgages allow you to borrow against any property (or land) owned by the business. A type of commercial loan, the lender will have a legal claim over the property until the mortgage has been repaid in full.
The range of commercial mortgage offerings has shrunk even more than the consumer mortgage market, but a number of fixed and variable rate mortgages are still available.
The type of investor you seek for your business will typically be determined by your size, and the industry you’re in. For most smaller companies, business angels can offer both capital and expertise, which can be invaluable to a fledgling enterprise.
You can read more about these options in our dedicated guide to funding a business.