There are many ways of funding a business but you have to decide first of all what sort of financing is best for you? Each of these will have a different impact on your business as it grows.
Debt Finance
This involves borrowing money, usually in the form of a loan or overdraft. It is the most widely available and frequently considered source of external finance. The bank loan is the most popular is where an amount is repaid at an agreed rate of interest in a specified time period with the interest rate being either floating or fixed. You will need to demonstrate to the lender an ability to service the repayments in order to guarantee a loan and sometimes security may be required, this means that if you fail to pay up on the loan the lender has a right to claim the asset.
The good thing about this type of loan is that because it is secured against an asset it is less risky than other types of loans and you would get better interest rates as well. A disadvantage could be that you would be locked into set payments of what may be a fixed interest rate and this could be a major problem for fast-growing companies that require a lot of capital
For this reason, a loan is suited to a tried and tested business model that can offer good prospects of profitability i.e. franchise. A loan is particularly useful if you require longer-term finance for a specific purpose or planned expenditure.
An overdraft on the hand is linked to your cash flow and not your capital and would usually need to be repaid on demand. It can be very expensive if you go above your limits. This particular type of debt finance is to help you overcome some of your most financially demanding periods that are usually linked with fluctuating working capital, as with this you can rely on the extra capital when you most need it.
You can also get debt finance through your suppliers via extended credit terms. however, this can only really be achieved if you have a close relationship with your suppliers. If the supplier is familiar with your business on the whole and understands your working strategy, and financial status they may be more willing to extend agreed terms
Another type of debt finance that is becoming increasingly popular is leasing or hire purchase, where you borrow assets with the option to buy.
Factoring or invoice discounting where you borrow against your sales is also becoming a popular way of obtaining debt finance.
Equity Finance
This is a way of raising finance by selling a shareholding in the company. This can be to an individual or institutional investors who will seek growth on their investments. A big advantage of it is that it never has to be repaid and there is no interest paid on the money. The investment is not secured against any particular asset as in debt finance and should the Venture fail, the investor may not get back the original amount invested.
You can get equity finance from different sources: business angels, venture capitalist, and the stock market. The amount of money you can get from these sources will vary with the minimum from business angels leaning towards the £25,000 mark- as anything less than this would not be appropriate because of large fixed costs.
All equity investors have on thing in common, they are willing to take a risk and invest to see your business grow and succeed but they must have a corresponding high return on that investment. If your company/business idea cannot support at least 20% growth then you may find it difficult to get this type of funding. The two main points are what attract investors to invest in your business.
You need to understand that you will not have full control of the company when using this type of funding, which is why some companies tend to head to the bank rather than this use this type of funding. However, if you rely on an overdraft as a major source of finance for your business you are also in effect handing over control of your business to the bank. You can be shut down overnight if the bank decided to call in the overdraft. The point here is that you should investigate all options thoroughly before deciding which is right for the purpose. A certain amount of control will have to be given away regardless of which financing option you choose.