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Money, cash, dough...it doesn't matter what you call it, there is never enough of it around. Finding the finance you need to run your venture is a major challenge facing every entrepreneur -- and it's a perennial stumbling block for first-time business owners.
The range of finance options on offer can be dizzying and confusing. So, in this episode, we will be looking at the different forms of funding available to business owners.
Despite widespread complaints that the banking sector is not doing enough to support UK businesses, High Street banks are still the first port of call for most start-ups.
The availability of business credit does seem to be improving, but competition remains remarkably fierce. From the outset you should recognise that business loans are now comparatively expensive. The halcyon days of cheap credit are over, at least in the short term, so you will need to factor the inflated cost of borrowing into your forecasts.
An increasing number of business owners are turning to friends and family for cash in the absence of readily available bank loans. Of course, informal finance of this sort has always been popular amongst entrepreneurs but, in the current climate, it is often the first choice.
It is common for transactions between friends or family to be treated very informally. There is often no written contract and, perhaps more worryingly, it is common for the two parties to be unsure about the terms of the agreement.
If you do seek funding of this type, make sure that you treat it in the same way that you would treat any other business transaction. Have a written agreement drawn up, ideally by a solicitor, and make sure that both you and the lender know the terms of the deal. This will help to minimise the risk of disagreement in the future.
In addition to the formal and informal finance available from banks and friends and family, the government offers a range of support for new and existing businesses.
This support comes in a range of different shapes and sizes. Traditionally, the most popular of these has been the Small Firms Loan Guarantee, which has now been replaced by the Enterprise Finance Guarantee scheme. This scheme helps viable businesses secure loans, by offering a guarantee to lenders. The government essentially puts up collateral for 75 per cent of a commercial business loan, up to a value of £1 million. This helps to overcome the problems associated with persuading lenders to take a risk on a small business -- particularly in the current economic climate.
The government also offers a range of grants to new and existing businesses. These tend to be targeted at very specific industries, and the criteria for qualification are very stringent. Probably the most wide-ranging is the Grant for Business Investment. This is designed to help viable businesses purchase new assets or expand their operations, particularly when this will allow them to create new jobs. Grants of this sort are available from £10,000 upwards.
When considering finance options, it is important to understand the different types of funding on offer. Loans are the most common. The bank or another lender gives you some money, and you pay it back, plus interest, over a set period.
Equity finance is the other major form of funding available to businesses. Under these arrangements, an investor will give you money or assets in exchange for a stake in your business. Depending on your agreement with the investor you might then have to pay them a percentage of your earnings. Alternatively, they might simply hold onto their stake with the intention of selling it on at a later date.
Following a couple of years in which equity funding was virtually impossible to come by, venture capitalists are now returning to the fray. If you are considering taking on this kind of investment, you need to think long and hard about whether or not you are prepared to give up a stake in your business. Remember that this is a long-term decision that could dramatically affect your finances.
Of course, deciding on the sort of finance you want is just one small part of the process. Once you have worked out what you are looking for, you will need to make yourself as attractive as possible to lenders and investors. So, in the next episode, we will be looking at drawing up a business plan and financial forecasts, and securing finance in the current difficult lending conditions.
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Understanding the challenges of starting a businessby SimplyBusiness283 views
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