Using Banks and Other Sources to Finance Your Business

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TeamPlayer

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The most common sources of additional finance are from bank overdrafts and loans.

To be able to borrow from a bank you'll need at least to:

* present a forecast for your business (business plan)
* possibly give evidence you've succeeded at a business in the past
* offer security for any money it lends you - either business assets or a personal guarantee
* invest some money in the business yourself

You may qualify for a loan under the government's Small Firms Loan Guarantee (SFLG) scheme.

Remember too that you may have to pay arrangement fees as well as interest.

Some banks offer new business customers an attractive rate to get their business, so it's always worth looking around to see if you can get a better deal. A reduction of just 0.5% a month on interest payments on a larger loan can make life a little more comfortable.

Many small businesses use an overdraft to cover their borrowing needs. But, for longer term financing, it's a good idea to consider taking out a loan.

Overdraft

* a flexible way of funding your day-to-day financial requirements
* interest is only payable on the amount you are overdrawn
* higher interest rates than loans
* leaves you with no contingency funds if you are regularly overdrawn
* bank can ask for repayment at any time

Loan

* you can match the term of a loan to your requirements
* easier to budget for repayments
* no flexibility - you could be paying interest on funds you are not using
* regular payments could cause cashflow problems
* you may have to offer some form of security

Using Outside Investors

Outside investors share in the profits - but if the business fails, they lose their money.

Typically, your company issues ordinary shares (standard shares with no special rights or restrictions) to investors in return for their capital.

If you can convince that your business offers the potential of greater returns over the longer term they may be willing to forego early returns for the promise of higher returns in the future.

Advantages

* not only are you getting the funding, but usually you benefit from additional expertise, which can be extremely valuable in itself
* normally you won't have to make payments to investors until the business can afford them
* because of the capital invested in the business it makes it easier to borrow from the bank if necessary

Disadvantages

* you give up a share of the business, and of its profits, will be lower
* investors may want some say over how you manage the business
* investors may want the business structured in a way that makes it easier to sell their shares in the future

Sources of investment

There are several different sources of investment:

* business angels
* investment funds and venture capitalists for larger investments

Business angels are wealthy individuals who typically invest £10,000 upwards and may also offer business expertise. Venture capitalists are for the bigger business, usually investing more than £2 million in businesses they believe will provide a high earning potential and a defined exit time.

Again, a sound business plan is essential. Prospective investors will want to see detailed financial forecasts and what you will do with funds invested in the business.

Grants and government support


Depending on several factors you may qualify for a grant or government support to help your business off the ground. What and who qualifies frequently changes with time and needs of the country, so it's always worth checking to see if you can get assistance. Sometimes, for example, unemployed people can get assistance if they start up their own business.

You might get a subsidised or no-interest loan, or even an outright cash grant. Support schemes will also often provide expert advice, information or subsidised consultancy.

But, it isn't made easy.


* a lot of people want grant schemes, so there's a lot of competition, and often available resources are limited
* you must meet the scheme's criteria which could include your business location and size, and how you plan to use the money
* the application procedure can be complex and drawn out
* you normally have to use the grant for a specific project, rather than general business costs
* grants aren't usually for 100% of the project, you'll only get a percentage as you'll be expected to put your own, (sometimes matching) funds in
 
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