3.1. Finance - Sources of finance

Overdrafts and loans are the most common form of external financing available to businesses. Used properly, they provide a simple and effective way of financing the growth of your business. But despite their widespread use, they are not always used wisely. Many businesses make the wrong choices or incur unnecessary costs. At best, this raises the cost of financing. At worst, the business runs the risk of failure.

This briefing focuses on:

• Deciding which form of financing to use.
• Minimising the cost of financing.
• Security.

Government Support

If you have a promising business but cannot provide the security needed for a conventional bank loan, the Government’s Small Firms Loan Guarantee may be what you need.

Alternatively, other supported loan schemes (loans subsidised by government or local agencies) may reduce your borrowing costs if you meet their lending criteria.

This briefing covers:

• The Small Firms Loan Guarantee Scheme.
• Which business activities are most likely to qualify for other supported loan schemes.
• How to apply.
• An overview of the major schemes.

For businesses requiring additional finance, which are unable or unwilling to increase their level of borrowing, bank finance — in the form of secured loans and overdrafts — is not an option. If you cannot provide further capital from your own resources, venture capital (also known as private equity finance) may be the answer.

Venture capital (VC) firms provide financing in return for a proportion of your shares. They take a higher risk than banks do in the expectation of receiving higher returns.

For your part, you have to decide whether the involvement of a venture capital firm is worth a smaller slice of a larger pie.

This briefing outlines:

• Whether venture capital will suit you.
• How to obtain it

Individual investment

Finance of £10,000 to £250,000 can be surprisingly difficult to obtain. Banks generally require security and most venture capital firms are not interested in financing these amounts.

'Business angels' are wealthy, entrepreneurial individuals who provide capital in return for a proportion of your shares. They take a high personal risk in the expectation of owning part of a growing and successful business.

This briefing will give you a good idea of whether you should look for a business angel.

It covers:

• Whether this form of financing will suit you.
• How to find and approach business angels.
• How to present your business to potential investors.
• What is involved in the investment process.

Raising the money

If you have decided to invest or reinvest in cars for your business, raising the money is unlikely to be a problem. Provided that you have the cash for the deposit, and a reasonable credit record, any dealer will arrange terms.

But arranging terms is one thing; arranging good terms is quite another. Get it right, and you will have an arrangement that works so well you never have to think about it again. Get it wrong, and you could end up with big headaches and even bigger bills.

This briefing looks at the factors you need to consider. It covers:

• What you want.
• Using a dealer.
• What type of finance to use.
• Extra services.

Spreading the cost

Hiring or leasing equipment is one way of making your working capital go further. Instead of paying out up-front, you can spread your payments over a set period, and benefit from the use of the equipment in the meantime.

Of course you have to pay for this benefit, but with the right deal it will serve you well. With the wrong deal, you could end up paying well over the odds or being involved in a dispute. So think through what you want to achieve, and check the small print on the deals you are offered, before you sign anything.

This briefing looks at the advantages of equipment finance (or 'asset finance', as it is often called), and suggests some ways of ensuring it meets your requirements.

It covers:

• Deciding whether equipment finance is right for your business.
• Different forms of finance arrangement.
• What to look out for.
• Where to get help.

Don’t miss out

Getting grant-funding could really help your business develop and grow. But even experts can find it difficult to keep track of the hundreds of different grant schemes which keep appearing – and then disappearing. This briefing outlines the kind of grants available to small and medium-sized businesses. It explains the criteria a project must meet to qualify for a grant, and the potential benefits – and pitfalls – involved in applying.

This briefing covers:

• Which business activities are most likely to qualify.
• Factors that could affect your eligibility.
• How to identify grants you might be entitled to.
• How to apply.