Choosing a method to finance your business is the most important step you will take. If you’re not sure which way to go, have a look at our handy breakdown of the most common sources of finance.
Finance from your bank
All major banks offer various financial support choices for businesses. They can also give advice on what would suit you best. The kinds of options you’ll be looking at are:
Fixed term business loan
This option is where money is borrowed over a fixed period of time. It’s repaid with interest by monthly instalments. You can use a business loan to support your long-term plans or as working capital.
Credit cards and business overdrafts
For seasonal businesses or for those dealing with low cash levels, credit cards and overdrafts can be a handy source of finance. It can work for businesses that need an extra income during quiet times, in order to keep trading before money starts moving through the business again.
Cashflow finance solution
This option allows businesses to borrow money against the value of their unpaid invoices. This means that within 24 hours of issuing an invoice, it’s possible to receive up to 85% of its value. The balance of the invoice is received when the customer pays up (less the service charges).
Borrow money against assets
It’s possible to borrow money against your assets. These could include inventory, property or equipment. The value of the asset will dictate the amount of money you can borrow. This can be a good way to raise money for working investment or capital.
The EFG (Enterprise Finance Guarantee) scheme
For entrepreneurs with a strong business project or idea, but who are finding it difficult to meet a lender’s criteria for a loan, then the EFG could be the right choice. It’s available to people who meet criteria set out by the British Business Bank.
The Government Solutions for Business scheme offers a range of state grants. They are generally linked to specific sectors, such as R&D (research and development). These grants don’t have to be repaid, so they don’t represent a drain on cashflow. However, the criteria to qualify are strict.
Investment from outside sources
Offering equity in your business (or a share) to a third-party investor can be a good way to raise money. These differ from loans because you might not have to make any repayments. However, it’s worth bearing in mind that angel investors (wealthy people who back businesses with their private money) demand high shares of businesses in return. It’s a good way to finance growth plans.
Friends and family loans
While this could seem like the easiest way to get cash, it’s worth thinking about the pros and cons. These kinds of loans or investment are often more flexible. For example, they can be more lenient on when you must repay than a bank. This could allow you to put off the repayments until you are turning a profit. You could also potentially have loans from a bank and from family or friends, as long as you can keep up repayments.
However, borrowing in this way is a big commitment for both sides, and everyone must be very clear on the terms. Any problems down the line could risk damaging important relationships, so it should only go ahead with a formal contract, ideally drawn up by an independent solicitor.