Starting
up in business
Sources
of Finance
The
financing of your business is the most fundamental aspect
of its management. Get the financing right and you will have
a healthy business, positive cash flows and ultimately a profitable
enterprise. The financing can happen at any stage of a business’s
development. On commencement of your enterprise you will need
finance to start up and, later on, finance to expand.
Finance can be obtained from many different sources. Some
are more obvious and well-known than others. The following
are just some of the means of finance that are open to you
and with which we can help.
Bank
Loans and Overdrafts
The
first port of call that most people think about when trying
to obtain finance is their own bank. Banks are very active
in this market and seek out businesses to whom they can lend
money. Of the two methods of giving you finance, the banks,
especially in small and start-up situations, invariably prefer
to give you an overdraft or extend your limit rather than
make a formal loan. Overdrafts are a very flexible form of
finance which, with a healthy income in your business, can
be paid off more quickly than a formal loan. If, during the
period you are financing the overdraft, an investment opportunity
arises, then you could look to extend the options on your
overdraft facility to finance the project.
Many businesses appreciate the advantages of a fixed term
loan. They have the comforting knowledge that the regular
payments to be made on the loan make cash flow forecasting
and budgeting more certain. They also feel that, with a term
loan, the bank is more committed to their business for the
whole term of the loan. An overdraft can be called in but,
unless you are failing to make payments on your loan, the
banks cannot take the finance away from you.
Many smaller loans will not require any security but, if more
substantial amounts of money are required, then the bank will
certainly ask for some form of security. It is common for
business owners to offer their own homes as security although
more risk-averse borrowers may prefer not to do this. Anyone
offering their house as security should consult with any co-owners
so that they are fully aware of the situation and of any possible
consequences. Another source of security may be the small
firms loan guarantee. Start-up business unable to provide
any other form of security may be able to get a guarantee
for loans up to £100,000. Under the scheme, you pay
an annual fee, and in return, the government guarantees to
repay the bank (or other lender) up to 75% of the loan if
you default.
Savings
and Friends
When
commencing a new business, very often the initial monies invested
will come from the individual’s personal savings. The
tendency of business start-ups to approach relatives and friends
to help finance the venture is also a widespread practice.
You should make it clear to them that they should only invest
amounts they can afford to lose. Show them your business plan
and give them time to think it over. If they decide to invest
in your business, always put the terms of any agreement in
writing.
Issue
of Shares
Another
way of introducing funds to your corporate business is to
issue more shares. This is always a welcome addition to business
funds and is also helpful in giving additional strength to
the company’s balance sheet. However, one needs to consider
where the finance is coming from to subscribe for the new
shares. If the original proprietor of the business wishes
to subscribe for these shares, then he may have to borrow
money in a similar way to that discussed above. Typically,
however, shareholders in this position are often at the limit
of funds that they can borrow. Therefore, it may be necessary
to have a third party buy those shares. This may mean a loss
of either control or influence on how the business is run.
An issue of shares in this situation can be a very difficult
decision to make.
Venture
Capital
Approaching
venture capital houses for finance will also mean an issue
of new shares. The advantage of going to such institutions
is the amount of capital they can introduce into the business.
The British Venture Capital Association offers useful free
publications (www.bvca.co.uk).
Further information can be obtained from the National Business
Angels Network (www.bestmatch.co.uk).
Because of the size of their investment, you can expect them
to want a seat on your Board. They will also make available
their business expertise which will also help to strengthen
your business, although inevitably this will come with an
additional pressure for growth and profits.
On a smaller scale, the government has introduced various
tax-efficient schemes for entrepreneurs to invest in growing
businesses. The current schemes available are called the Enterprise
Investment Scheme (EIS) and Venture Capital Trusts. We have
separate factsheets providing detail in this area. They are
similar schemes but complementary to one another. The former
allows an individual to invest directly in your company and
the latter allows an individual to invest in a fund which,
in turn, will invest in a portfolio of venture capital investments.
The investors will get 20% and 40% income tax relief respectively
on any monies invested.
Another useful element of the EIS is that it allows any person
with capital gains to defer these gains by investing into
a company requiring venture capital. This route, unlike the
income tax route, due to less stringent conditions, is available
to controlling shareholders of such growing companies. If
your company requires finance and you have a capital gain,
we can advise on how to use the deferral relief effectively.
Retained
Earnings and Drawings
Since
ultimately the well-being of a business is connected with
the cash flow of that enterprise, if a proprietor would like
more liquidity, then it is sometimes necessary to re-examine
the amount of money they are withdrawing from the business
for their personal needs. In this way, additional funds earned
by the business can be retained for future use.
Other
Finance
Other
possible sources of finance are outlined below.
Factoring
Factoring provides you with finance against invoices that
your customers have not yet paid. Typically you can receive
around 80% of the value of the invoice immediately and the
balance (less costs) when the customer pays.
Hire Purchase (HP)
This is used to finance the purchase of equipment. Your business
buys the equipment but payments of capital and interest are
spread over a period of up to five years.
Leasing
This is a method of financing equipment you do not need to
own. It is often used for vehicle finance. The equipment is
rented rather than owned and the rental payments spread over
several years. There can also be the option to fix maintenance
costs as part of the agreement (contract hire).
Matching
It
makes sense to match the finance you are seeking to the purpose
for which it will be used.
| Working
capital |
- |
overdraft
or factoring |
| Equipment
and vehicles |
- |
fixed-term
loan, HP or leasing |
| Property |
- |
long-term
mortgage |
| Development
/ start up |
- |
investment
finance. |
How
We Can Help
We
have the expertise and the contacts to help you at all stages
of your business development and to help you finance the business
along the way. If you have any questions or proposals, we
would be happy to discuss them with you.
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of page
For information of users: This material is published
for the information of clients. It provides only an overview
of the regulations in force at the date of publication, and
no action should be taken without consulting the detailed
legislation or seeking professional advice. Therefore no responsibility
for loss occasioned by any person acting or refraining from
action as a result of the material can be accepted by the
authors or the firm.
|
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