Posted on 09/08/2012, 10:25
Access to finance is a highly contentious issue for small businesses despite there being many funding options available. Despite what many people think, banks are still in the business of lending money but the difference is they now want more due diligence done to ensure the business they are lending to is stable enough to repay it. And there are also many other alternative funding options available.
We’ll take a look at some of these options in a little while but before thinking about the different forms of funding you should first consider if external funding is the right solution for your business? It may be but before making that decision you should take a close look at your own business.
Before you get yourself into debt with a funding organisation always check if the finance you need could already be within your business. Many companies look to external finance to solve problems that could be better solved by restructuring the way they work. For example, if you need to resolve a cash flow problem you should first look at how you deal with the cash within your business. Are you holding too much stock and could your credit control be improved so you collect money from your customers more quickly?
And, if after reviewing the way you work, you decide you that do need external financing for your business you need to be clear about how much you will need and when you will need it? If you borrow too much you could be paying interest on money you’re not using but if you borrow too little you could have to also rely on an additional overdraft facility to top up your funding, or even worse, not be able to complete your growth plan. Therefore it’s important to accurately predict how much money you will require and the way to do that is to make sure you have a business plan which includes a budget and a cash flow forecast.
Only when you’ve done this proper preparation should you think about whether you will need short-term or long-term funding. Short-term funds, such as an overdraft, are suitable for day-to-day needs of your business but for longer-term projects, such as purchasing large assets needed by your business, long-term funding, such as a loan, is likely to be a more cost-effective solution.
But whatever type of funding you need and whoever you approach for that funding, you must be able to answer questions such as: Why do you need the money? What do you plan to use it for? How much are you personally putting in? How and when do you plan to repay it? Do you have any security? What other options have you considered and rejected and why?
Self-funding by using your own savings and investments – It’s one of the cheapest ways to fund a business. You won’t have debt and interest or loan charges and it shows commitment. However, you may be using up valuable reserves that may be needed as a contingency in the future.
Borrowing money from family and friends – Family and friends may be prepared to lend when others won’t and the terms agreed are usually better than from a bank. But if you do borrow from them ask yourself “why are they prepared to lend when external organisations won’t?” Just be sure it’s not because your business plan isn’t up to scratch! And make sure you still agree legally binding terms with family and friends.
Borrowing money from banks – Businesses often don’t approach their banks when seeking finance solutions and this may be because they have been rejected before or because they believe they will be rejected. Like all external finance options bank lending requires a business to be able to meet their lending criteria. If you don’t know what their criteria it’s very likely that your business case won’t match them. So, make sure you know what your bank is looking for and prepare a case that matches this. You’ll find your chances of success are increased and your preparation will be of value if you subsequently approach other funding sources.
Equity investments – If you are prepared to give up a part of your business in return for an investment of cash then consider seeking equity investors (either Business Angels or Venture Capitalists depending on the amount of investment you need). The upside is that you should benefit from the skills and experience of the investor or investors but you will need to be prepared to give up some of the control of your company as the risks for the investor are high.
Crowdfunding – Compared to more traditional sources of small business investment this is relatively new and not suited to every business. The Oxford Dictionary definition of Crowdfunding is: The practice of funding a project or venture by raising many small amounts of money from a large number of people, typically via the Internet. If this is something that interests you seek advice and make sure you fully understand the pros and cons before proceeding.
Leasing –Leasing allows you to acquire the assets your business needs without owning them. You may find this option is more expensive in the long-term than a business loan but because the lease payments are scheduled over a period of time you can match them to your business cash flow.
Factoring and invoice discounting – This is where a factoring business or invoice discounting company advances money against your invoices as soon as you raise them. It’s normally used by businesses that offer credit terms on invoices and speeds up cash flow by reducing the time between issuing invoices and getting paid. The factoring company pays you immediately and gets the money from your customer when it’s due. You will be charged a percentage fee but it may mean you don’t need a loan or overdraft to keep your cash flow healthy.
Grants – When it comes to grant funding it’s often best to assume there is none before you pursue this option as the amount of grant funding is limited these days. That said there are still organisations that provide grants that you don’t have to pay back. Whether or not you are likely to be eligible depends on you and your background, your geographic location and the sector it operate in. Grants are available from central, local and European government and some charities.
So, in conclusion, there are still many funding options available to small business, including the banks. However, the problem often tends to be that business owners don’t fully understand what the funding organisations they approach are looking for, what they need to have in place, what they need to be able to demonstrate to potential funders and how to correctly position their company to gain the investment required!
Pro-actions can help! We can help improve the performance of your businessand get it ready to take a business case to a potential funder to get that all important finance agreed to help your business grow.
Director | Pro-actions Sussex
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