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Types of Business Financing

Small Business_TaxAgility Accountants LondonBusiness financing comes in many forms.  The types of business financing you need at any one moment depend on a variety of factors, including the amount of money you’re looking to borrow, whether you’re prepared to provide personal assets (such as your home) as security, and whether you’re comfortable with the prospect of selling shares in your company.

Below we’ve detailed seven of the most common types of business financing currently available in the UK. To speak with a professional regarding what financing method is most suitable for your business in your current situation, our contact details are below.

Investment Finance

Sometimes referred to as equity finance, you receive investment finance whenever you sell shares in your company to an investor.

The advantages of this method are that you don’t have to pay interest on their investment, and your investor will be useful in bringing new skills, ideas, and opportunities to your business, as they have a financial interest in your success. Disadvantages of this method, however, are that only limited companies can sell shares (not sole traders or partnerships), and you’ll end up owning a smaller percentage of your company.

If you are starting a new venture or have a small business in the UK, you may qualify for funding via the Enterprise Investment Scheme (“EIS”) and/or the Seed Enterprise Investment Scheme (“SEIS”).  There are a number of requirements that need to be met.  For a quick overview and more information on the schemes, read our pages on EIS and SEIS.

Loans

Loans are a form of immediate credit, paid into your bank account, that you must then repay over an agreed period of time with interest. Loans are ideal for achieving startup capital or paying for necessary assets, but they should not be used to pay for ongoing, monthly expenses.

Advantages of loans are that they’re not repayable on demand (see ‘overdrafts’ below) and you don’t have to give up a portion of your company. Disadvantages include the fact that most loans are incredibly inflexible, and the ability to meet your loan payments may sometimes be out of your control; such as when customers don’t pay you on time.

Overdrafts

Overdrafts are a short-term means of achieving credit from the bank you hold your business current account with; they are not a source of long-term financing.

The advantages of borrowing via an overdraft are that you can do so any time and, unlike most loans, you’re not usually charged for paying off your overdraft early. Disadvantages, however, are the fact that you’re charged when you exceed your overdraft limit, and your bank can terminate your overdraft at any moment.

Grants

Grants are a specific sum of money that’s awarded to you (as a business or individual) to undertake a chosen project.

Advantages of receiving a grant, whether from the Government, your local council, or elsewhere, are the fact that grants don’t need to be repaid and you won’t have to hand out shares in your company. The main disadvantage of grants is the fact that there’s consistently fierce competition for them, therefore to have any chance of receiving one you must focus in on a specific area of expertise and apply for a grant based on a project that’s related to your business, that you haven’t yet started.

Crowdfunding

The popularity of crowdfunding for business financing has grown in recent years due to a number of sites such as Kickstarter and Indiegogo coming onto the scene as a way of letting businesses and individuals receive crowdfunding finance from around the world.

The advantages of crowdfunding are it allows you to raise finance relatively quickly; rather than having to persuade one investor to hand you a large sum of money, you have to convince a large number of people to hand you a tiny sum of money each. One major disadvantage of crowdfunding, however, is the fact that if you don’t reach your fundraising target within a set time period, all money raised up to that point will be returned to investors.

Invoice Financing (Factoring and Invoice Discounting)

Invoice financing is a method of business financing whereby another company (an invoice financier) buys your unpaid invoices from you for a fee. There are two methods of invoice financing:

Factoring

Your sales ledger is handed over to an invoice financier, with them paying you a percentage of each invoice (approx. 85%) upfront. They’ll then collect all money owed from your customers for you, handing you the remainder of the balance, with you paying them interest on the original sum they paid you, along with their fees.

The main advantage of this method is the fact that you no longer have to worry about chasing invoices, but conversely your customers may prefer dealing with you directly.

Invoice Discounting

Your invoice financier will lend you funds against your unpaid invoices, with you paying them a fee for doing so. When your customers eventually pay their invoices this money will go directly to your invoice financier.

Advantages of invoice discounting are that you can maintain your close relationships with your customers, as they’ll have no idea you’re borrowing money against their invoices. Disadvantages of this method, however, are that you lose a certain percentage of each invoice, and you still have to collect the debts yourself.

Leasing and Asset Finance

Rather than seeking out financing to pay for a necessary business asset you may wish to lease or rent assets (such as vehicles or machinery) so you don’t have to deal with the cost of purchasing them until you have more capital under your belt.

Advantages of this method are that you’ll be able to lease higher-quality assets than you can currently afford to buy, and the leasing company are the ones at risk if your assets break. Disadvantages, however, include the fact that long contracts are often difficult to cancel prematurely, and in most cases you’ll have to provide the leasing company with a number of upfront payments and a deposit.

Experienced Advice on Types of Business Financing

To speak with a professional to discuss which method of business financing is most suitable for you in your current situation, contact us today on 020 8780 2349 or get in touch with us via our contact page to arrange a complimentary, no obligation meeting.

 

This blog is a general summary. It should not replace professional advice tailored to your specific circumstance.

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