8 ways to finance your business

At any stage of your business’ life, you’ll need to make sure you have enough money in the bank to move forward. From its initial set-up, through every step of its growth, ensuring that you have access to the finance you’ll need is crucial to its success.

Our Corporate Finance team works with clients at various stages throughout their lifespan to ensure they have the most cost-effective and appropriate funding to help them move forwards. Many clients ask the team how to raise that much-needed capital to finance their company’s growth – whether it’s getting the business off the ground or covering corporate expenses along the way. So we caught up with Darren, who heads up Corporate Finance, for some simple tips on financing your business. If you’d prefer to skip the text and discuss it in person, simply click the green button to chat about your specific needs.

Debt or equity

There are two basic ways to finance a business: debt and equity, and all financing solutions consist of one or the other, or a combination of both.  The best solution for your business will depend on your specific circumstances.

  • Debt – this is a loan or line of credit that provides you with a set amount of money that has to be repaid within an agreed period of time. Most loans are secured by assets, which means that the lender can take the assets away if you don’t pay. A loan can also be unsecured, but it’s less usual in a professional setting.
  • Equity – selling a part of your business (known as selling an equity stake) means that you wouldn’t have to pay back the investment because the new owner of the equity would have all the benefits, voting rights and cash flow associated with the equity stake they’d bought.

Here is an overview of some of the more common methods of financing a business.

  1. Savings

The easiest way to finance your business is to use your own money. It’s fantastic if you’re able to save money over time then use these savings to fund your business. However, most business owners (or potential business owners) are limited by the amount of money they can save. Some people borrow money against their homes, retirement plans, or insurance policies in order to develop their businesses. This is risky! If the business fails, you could lose everything. Although we like to stay positive, the reality is that a high percentage of businesses fail in the first couple of years, so remember that the odds are stacked against you.

  1. Friends and family

Would your friends and family be interested in investing in your business? You could offer them an equity investment or – if you feel it’s appropriate, ask them for a business loan. Think carefully about your personal relationships though. Is it likely that your new ‘silent partners’ would expect a say in your business decisions? And how would it turn out if you ignored their advice or demands? It’s definitely worth bearing in mind that this could also become problematic if the business should fail. Would you be willing to risk your relationship for the sake of your business?

  1. Business loans

There are various sources of loans available to UK businesses and entrepreneurs. Many people’s first port of call is their bank or building society, where the loan is repaid over a number of years. One issue with this is that most banks only provide finance if you have a successful track record and substantial assets that they can call upon if you’re unable to repay the loan. The interest rates may be particularly high too, making this an expensive option for your business.

There may be other loans available for you, depending on your industry, so do some research, or ask our corporate finance team to guide you in the right direction.

  1. Credit cards

Credit cards are another option for financing your business growth. You can also use them to help ease your cash flow, such as by paying suppliers.

  1. Cash advances

Your credit card provider may allow you to take a cash advance. Most credit card companies set limits for this and often charge high rates. This means that using cash advances can be expensive. Try not to overextend yourself, and don’t forget that borrowing on your credit card will affect your overall credit score.

  1. Angel investors

Angel investors usually invest in businesses by buying some of the equity. They can provide money, expertise and guidance to help launch a business then steer it toward success over an agreed period – often 3-5 years. This is not an easy option though, as you have to demonstrate potential growth with a solid business plan that covers the set period of time. After this, the angel investors would expect to recoup their profits.

  1. Invoice factoring

This is a useful source of finance if your company has cash flow problems due to clients paying their invoices late. It enables you to sell your unpaid invoices (accounts receivable) to a factoring company for a percentage of their total value, then the factoring company takes responsibility for collecting the invoice payments. It means you don’t receive the full amount of the original invoice, but your cash flow is improved.

  1. Purchase order funding

Growing businesses sometimes receive nice orders but then struggle to pay for the products to actually be produced or imported.  Purchase order funding is a specific type of help offered to companies in this situation. The finance company pays the supplier directly, allowing the business to fulfil the confirmed orders.

Every business is different and every business owner is in a different financial starting position when they need to access finance. That’s why it’s best to chat through the issues with an expert in this field. Our Corporate Finance team are always happy to provide bespoke guidance to meet your specific needs. Simply click the green button to get in touch.