Whether you are an established business looking to raise money for a project or a start up seeking funding to kick-start your venture, finding a method of finance that works for you and your business is crucial.
Overdrafts are a form of credit provided by the bank. Overdrafts are a flexible form of funding that can be suited to covering short-term outgoings and unforeseen business expenses. Overdraft limits must be agreed in advance and interest is generally charged on any money you receive from an overdraft. Overdrafts are not a suitable source of long-term finance.
Loans are a conventional source of funding for the majority of businesses. Bank loans are taken out for a fixed term, with interest rates agreed in advance. You may alternatively able to consider a loan from friends or family. In this instance it is vital that you draw up a legal binding contract that covers all aspects of the transaction in order to avoid potential upset.
Banks tend to be extremely cautious about lending, therefore you must make sure your business plan is up to scratch and your reasons for borrowing are legitimate.
Grants and government support
Grants are a source of funding that is usually provided by councils, the government or charities. This can be an extremely inexpensive form of financing as they are generally non-repayable.
Funding through investment involves selling a part of your stake in the business to an interested party. Only limited companies are the only type of company that can sell shares to the business. Therefore, this is not an applicable form of funding for sole traders and partnerships.
When you sell shares to your business any profit or loss the business makes is shared with the investor. The advantage to funding through investment is that there is no charged interest or monthly repayments. Although does result in a lessening of control in the company.
Debt factoring and invoice discounting
Factoring involves selling unpaid invoices to a third party and paying interest and/or a fee to them. The third parties will then collect the debt.
This form of finance can be suited for businesses that want to release money tied up in unpaid invoices.
Leasing equipment allows businesses to avoid spending large amounts of money in one lump sum. This can be particularly beneficial for a businesses immediate cash flow. The main down side to leasing is that, normally, the interest charged makes the equipment cost more overall than buying the equipment, as well as the monthly outflows being higher.