I want to grow my business – what funding options are available?
Planning, people and profit are important when it comes to running a successful business. However, one of the biggest issues for a growing business is cash. Growth requires cash whether to fund investment in people or assets, or to finance higher levels of stock purchasing. Here, Nelsons’ corporate partner David Kaplan outlines the different options available for funding business growth.
The traditional options...
Many people go down the self-funded route – whether using savings or getting support from family and friends – as there is no pressure from financial institutions and investors. However, while there may be a lack of pressure from funders asking for their money back or forcing you to exit before you’re ready, you can end up risking your relationship with loved ones by jeopardising their financial future. To avoid this, you should offer up a strong business plan with formal financial projections to let them know you take their money seriously, while also being upfront and honest by emphasising that there is risk involved. You should enter in to formal loan documentation and/investment agreements to regulate the terms of your arrangement so as to avoid any misunderstandings and disputes in the future.
You can borrow as much money as the bank is prepared to lend you – this is typically determined by your ability to pay it back and how much security you’re able to put up against the loan. Banks provide numerous funding products nowadays, not just simple overdrafts and term loans. When applying for a loan, the bank will ask for supporting financial information, such as profit and loss forecasts, a business plan and cash-flow analysis. It is also worth noting that substantial loans can take weeks or even months to secure. In theory, anyone with a feasible business and a clear repayment plan can borrow from banks. However, in practice, banks tend to prefer lending to existing businesses with a strong track record and established assets to act as security for a loan.
Other funding options available
As some sectors are struggling to secure funding, particularly from traditional sources, alternative funders (challenger banks, specialised funders, asset finance providers, peer to peer lenders and Government agencies) have stepped in to fill the gap. Alternative funders are usually more expensive but may be more likely to lend. Another benefit is that alternative funders can often make swift credit decisions and release funds to a borrower in a matter of weeks, allowing businesses to move quickly and take advantage of potential opportunities that arise. As businesses will still need other banking services, which alternative funders cannot provide, those considering this option will still need to think about how the two will work together.
Business Angels and Private Equity
Wealthy individuals or groups of wealthy individuals (Dragons) are another source of finance. With interest rates so low at the moment, people with cash are looking for ways to earn higher rates of return. These individuals generally look at obtaining a stake in your business in return for investment.
Private Equity houses are a further option. These are institutional investors who will provide loans in return for a stake in your business. Investments are generally made in established businesses or in high-tech start-ups.
If you are looking to raise funding you should always seek advice. Your bank, accountant or solicitors should be your first port of call and should be able to assist you with your growth funding requirements.
For advice and support on the funding options available to grow your business, please contact David Kaplan on 0800 024 1976 or email him at firstname.lastname@example.org.
Funding for Growth Seminar
Nelsons are holding a seminar with the IoD on Wednesday, 26th February at Nelsons’ Leicester office which will provide an opportunity to gain a better understanding of funding business growth. To book on contact Chloe Williams (email@example.com).