Raising finance for your business

Despite Government attempts to boost lending, latest figures suggest that bank loans for small businesses have continued to decline in recent months. According to the Bank of England, net lending to businesses suffered its biggest drop in April 2013, down by £3bn since December.

If you are struggling to acquire the financial capital you need to start or grow your business, it is important to consider the various funding options that may be available to you. It is crucial to find finance that works for you and your business.

Overdrafts

Overdrafts can provide a flexible means for covering short-term outgoings and unforeseen business expenses. Overdraft limits need to be agreed in advance and interest is ordinarily charged on any money you receive from an overdraft facility. Other charges may also be payable such as arrangement or renewal fees.

Overdrafts should not be used as a long term source of finance, and continued use may lead your bank to question whether you are in financial difficulty. If you find yourself overdrawn for long periods of time, contact us for advice.

Loans

Bank loans are taken out for a fixed term, with interest rates agreed in advance, so they are straightforward when it comes to incorporating monthly repayments into your financial plan. Repayment terms and interest rates can sometimes be negotiable, although banks are increasingly asking for collateral as an additional form of security.

Alternatively, borrowing money from friends or family may be an option if they are willing. However, it is important to draw up legally binding arrangements and to make sure every aspect is formally agreed in advance to avoid any potential upset.

Every loan application will show up on your credit file and banks are more cautious about lending in today’s economic climate, so make sure your business plan is solid and your reasons for borrowing are legitimate, before you apply. If you are a perceived high risk to the bank, you may be refused the loan.

For advice on how much money to request or for a financial assessment of your business before you apply, please contact us.

Grants and Government support

A grant is usually supplied by the government, local councils or charities, and for those that qualify, it can be a good source of cheap financing. It is non-repayable but there is a large amount of competition for this type of funding and grants are usually only offered to specific sectors or for specific projects that are in their proposal stages. Sometimes you will be asked to cover part of the cost of your project or to match the funds awarded to you.

Following the onset of the credit crunch, a number of Government lending schemes are now available to eligible businesses. Launched in 2009, the Enterprise Finance Guarantee is available to UK-based businesses looking for a loan of between £1,000 and £1m. Under the scheme, the Government underwrites 75% of all qualifying loans provided by commercial lenders to ‘viable’ SMEs. Certain eligibility criteria and conditions apply – further details are available at www.gov.uk.

Alternatively, eligible businesses using private sector investment may be able to bid for a share of the £2.6bn Regional Growth Fund, which operates across England from 2011 to 2016.

Meanwhile, young entrepreneurs can apply for the start-up loans scheme, which provides finance for 18-30 year-olds who are living in England and looking for finance to start a business.

To search for available schemes and grants in your sector visit www.gov.uk/business-finance-support-finder.

Investment

This option involves selling part of your stake in the business to an interested investor. The investor could be a wealthy individual, a private equity company or a larger company operating in the same sector. As only limited companies can sell shares, sole traders and partnerships are not able to use investment finance as a source of funding.

If you sell part of your business to an investor, any profit (or loss) the business makes will be shared with the investor. Advantages for this type of finance mean you are not charged interest and there are no monthly repayments. Often, new investors also bring varied skills to the table, which could potentially improve your business. However, this type of finance means relinquishing some control and investors often expect to be consulted before any management decisions are made.

Other sources of finance

• Debt factoring and invoice discounting – You could generate working capital for your business by releasing cash that is tied up in unpaid invoices. Factoring involves selling any unpaid invoices to a third party and paying interest and/or a fee on them, while invoice discounting provides a means of borrowing money against any unpaid invoices owed to your company (again, for a fee).
• Asset finance – Leasing equipment or entering into a hire purchase agreement means you can avoid spending a large amount of money in one lump sum, which is often beneficial from a cash flow perspective. Don’t forget, the cost of qualifying business equipment is usually tax deductible – talk to us for further details.

We can advise on the most suitable type of finance to suit your needs – please contact Greg Bolton for more information, 0191 256 9500 or advice@r-m-t.co.uk