Bobby Lane, a partner at accountancy firm Shelley Stock Hutter LLP and Talk Business’s Strategy Surgeon, has advised thousands of SMES across the country. Here he gives some pointers about the different ways you can raise finance:
1. Friends & family
Approaching your friends and family for finance isn’t always easy, but if you have a good sound business model they could be a good source and the best starting point.
Raising money against your own property can be one of the cheapest routes to debt finance. But beware, if the business was to fail do make sure that you will be able to survive the loss and still be able to make your mortgage payments. Only put at risk what you would be able to survive if it was gone.
3. Bank loan
You could go via the more traditional route and apply for a bank loan. If you can get through the banks credit committee then you will more than likely need to offer the bank security for the loan. If you do not have security available then you may be able to use the Enterprise Guarantee Finance scheme (see no 6).
4. Angel investors & crowd-funding
You may be able to find a third party investor with a different skill-set who could add value and the right connections to help you run the business. Make sure you pick your investor carefully. There are some new routes to help you find the investment that you need through crowd-funding sites.
The seed enterprise investment scheme is a fantastic incentive for investors of up to 100k (the company can raise 150k). They will receive 50% income tax relief on their investment. If the business is sold after three years there would be no capital gains tax on the sale of the shares if the business is successful. There would be additional loss relief if the business were to fail in the future and the shares were disposed of at a loss.
For a larger investment there is the Enterprise Investment Scheme or (EIS) which works in a similar way but the initial income tax relief is only 30%.
6. Enterprise Finance Guarantee Scheme (EFG)
If you approach the bank for a loan, you may well fall down at the last hurdle which is the availability of security to offer such as a house for the bank to secure your loan. The Enterprise Finance Guarantee Scheme involves the Government guaranteeing 75% of the loan with the bank taking the other 25% of the risk. However you will have to give a personal guarantee for the amount. Your business will need to be:
- UK Based
- Turnover of less than £41m
- Looking for finance of between £1k and £1.2m
- Repayment between 3m and 10 years.
- Start Up Loan Scheme
The Start Up Loan Scheme (www.startuploans.co.uk) was created by the Government to help people that are starting and growing their businesses. If you have been trading for less than 12 months you can access up to £25,000.
On top of the funding the borrower is also matched with a business mentor free of charge appropriate to the business who can provide a sounding board and support at the initial stages of your business.
Banks do not like offering overdrafts nowadays. In addition it may not be the best solution for a growing business. If the business is growing rapidly, then an overdraft may be nothing more than a temporary fix. In a short space of time it may need to be increased – but given the time to increase a limit and the security required this may not be quick enough to support the growth.
9. Asset based lending
This can often be the best source of finance for a growing business. Lower security requirements and more flexibility make this type of finance a good option for businesses that are looking to expand. In addition banks and finance providers are much more comfortable offering these types of facilities. However this will not be appropriate for businesses that do not offer credit to their customers.
10. Trade finance
If the business needs to address working capital issues and paying suppliers, then a further option is trade finance. Facilities such as letters of credit work well when purchasing from Asia and there are now some excellent stock financing products on the market which will all assist companies with their growth.