Decide on what sources of finance you will use

Decide on what sources of finance you will use

Written By Naomi Fisher

At some point all businesses will need money invested in them. Sources of finance is the origin of that money. This is where the money in the business will come from.

Your business may need financing for many different reasons, such as, whether it’s to start-up, hire staff, purchase a huge asset or expand. So, it’s very important that you choose the best source for your business, you may lose your company if you take it from the wrong source or be stuck repaying back the money instead of being able to grow your business.

How do you know when it’s time to finance your business?

In order to know when its time to pursue the financing option, you need to decide:

How much finance is required?

When and how long the finance is needed for?

What security (if any) can be provided?

Whether you are willing to give up some ownership of your business in return for investment?

Although it may seem like the easier option to head to your nearest back to acquire a loan, this may not be the case for all business, if you don’t have a solid financial history and a great business plan, you may not be able to secure a great deal. However, there are other sources of funding available, such as Start Up Loans, government grants, regional and community funding, and even business angel investors.

What are your finance options?

There are several different finance options that are available for small businesses, but only you can decide what its best for your business. Here is list:

Short term Financing (Less than a year)

Short term financing should be used for your working capital requirements and to cover you until you start generating enough income.

Types

Bank Over Draft

This is an effective short term finance option and is the most common. The bank agrees to a set overdraft limit and the business can use it to help day-to-day short-term requirements.

Pros

Its flexible

The business borrows only what it needs

Cons

It’s an expensive way of borrowing

Hire purchase/leasing

A business may lease a new fixed asset from a company to avoid having to buy it new outright which they may not have the funds, so they essentially rent it from the company for a predetermined period and price. However, the asset never becomes the businesses property.

If the business would like to own the assets at the end of the period, they could consider using the hire purchase option. They pay the monthly fees and interest rate and at the end of the agreement there may be a nominal fee.

Medium-Long term loans

Business loan

Banks offer several types of loans, medium to long term. Despite a fall in lending, the traditional business loan route is still a popular option for start-ups, and you have the advantage of retaining equity in your business.

The government is trying to increase the availability of these loans for small business, through initiatives such as Funding for Lending, Start-Up Loans and the Business Bank.

Small business grants

There are many different grants available to businesses. They are highly sought-after, and hence difficult to come by. If you can obtain one, however, the benefits are obvious and numerous.

Crowdfunding

Crowdfunding sites allow members of the public to pool their resources, investing as little as £10 each in start-ups. Crowdfunding is the practice of funding a project or venture by raising monetary contributions from a large number of people. Take a look at www.crowdfunder.co.uk and see what it is all about.

Angel investors

Angel investors can provide huge injections of capital early in a business’ life to propel it to new heights, as well as using their experience and connections within a sector to great effect.

Bootstrapping

Building a business out of very little or virtually nothing. Boot strappers rely usually on personal income and savings, sweat equity, lowest possible operating costs, fast inventory turnaround, and a cash-only approach to selling. The term derives its meaning from the expression “lifting oneself up by one’s own bootstraps”, referring to raising oneself up by one’s own means

Bootstrapping means less money needs to be borrowed and interest costs are reduced. Bootstrap financing really begins and ends with your attention to careful management of your financial resources. Be aware of what you spend and keep your overhead low. If you need to go the top-dollar route, make sure you can justify the expense. Don’t choose an overly expensive office or location unless it’s really going to pay off in increased sales.

To obtain a loan or overdraft, you must be able to prove to the lender that the business will generate the income and cash to both repay the facility according to the terms of the loan, and service the loan by meeting interest payments.  This is where your business plan is essential.

Extremidy is a business management company. Our aim is for small businesses to, connect, grow and succeed, by providing them with support, networking and assistance.
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Extremidy Team
www.extremidy.co.uk

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