Guide to Finding Finance
Banks and accountants can provide advice about financing a business, via loans, overdrafts, government grants, and there are a number of specialist lenders which will also make loans to businesses.
The key is for the company is to find suitable advice, shop around for the best rates, and to discover exactly what it needs to prosper.
Bank loans are the obvious choice for company loan seekers. Banks want to know whether the business has other sources of finance as well, when deciding whether to loan funds.
Businesses without security or new businesses may also benefit from the Small Firms Loan Guarantee Scheme, in which the government intervenes to act as a guarantee in case the business defaults on a loan repayment. The government encourages the support of new business as they can help lift the economy and provide jobs.
Another way of financing a business is through venture capital, which involves selling a stake in the business to an investor in return for an upfront cash sum. The investor then has a direct interest in the future of the business, taking a slice of the profits, and indeed they will sell their stake for profit at some point.
It will be for the business to persuade the investor (or firm of venture capitalists) that the investment is a sound one, with strong growth and profit potential.
The business will also need to consider how much equity it will be willing to part with, bearing in mind that this is linked to the control of the future direction of the business.
Depending on the nature of the business in question, the return to the investor may also be more than a simple financial one. It could involve the part-ownership of a product, future products or intellectual property.
For this reason, capital venture as a method of financing is not necessarily suited to every business, and it is advisable to speak to an expert, such as an accountant or solicitor, right from the beginning.
There are a number of avenues worth exploring if venture capital appeals:
The Regional Venture Capital Funds (RVCF) may lend up to £500,000 to small business with growth potential.
Professional body The British Venture Capital Association (bvca.co.uk) has a range of information about its members and could help a fledgling firm looking for capital.
Any business, whatever its size or nature, will need a bank account in order to carry out its work, and securing the best deal for the business's specific circumstances is therefore one of the most important considerations for any company starting out.
In terms of which bank to choose, it naturally makes sense to look at what is offered by the bank where a personal account is held. However, it is important to compare this with several other deals offered by different banks. Different facilities may be offered, such as internet and telephone banking, and bank charges will vary.
Although a bank will publish its standard tariffs for businesses, it is always worth negotiating to try and get a better deal.
Here again, it is important not to automatically settle for the same bank that is used for a personal account. Banks that are looking to attract a new customer may well make a better offer.
Banks can either choose to charge for each piece of business that passes through an account, or may charge a fixed amount per period, for example by month or quarter. Alternatively, charges may be based on the amount of money passing through an account over a given period, i.e. the turnover. For example, HSBC offers a different charging mechanism depending on whether the business's turnover is greater than or less than £500,000. It imposes a standard "small business tariff" for the latter and a negotiated "money transmission" pricing system for turnovers higher than £500,000.
In general, however, it is worth remembering that banks charge more for accounts where more cheques are transferred. Automated payments, such as over the internet, are generally cheaper, as well as often being more convenient. Internet banking also allows you to view direct debit payments and offers telephone support in case of problems, although hours can vary.
It is also possible for a business to borrow from the bank, although it will need to provide documents constituting evidence of an ability to repay. Fixed term loans may be a better option than overdrafts in the long run, as banks can demand overdrafts are repaid at short notice. Banks can also provide guidance about other sources of funding, such as grants.
Of course, banks lend based on the ability to repay, so a business plan will need to show that this prospect is viable. It will want to know whether the business is making a profit and will make a judgement as to whether future predictions are likely to materialise.