Sources to consider when raising business finance

08 Aug 2019

Raising funds for your business often proves to be a significant challenge for many firms. There are various options to consider, no matter whether you're looking to start a new business or require capital in order to expand.

Taking a look at loans

Loans are often the most conventional source of finance for firms. Bank loans can be taken out for a fixed term, with interest rates agreed in advance, meaning that they are straightforward when it comes to incorporating monthly repayments into a financial plan. Interest rates and repayment terms can more often than not be negotiated, although banks are increasingly asking for collateral as an extra form of security.

Entrepreneurs may be able to borrow money from friends and family, if they are willing to lend. In these circumstances, it is vital to draw up a legally binding arrangement and ensure that every aspect is formally agreed in advance. This could help to avoid any potential upset or bad feeling between the parties concerned.

Each loan you take out will appear on your credit file, and banks are becoming cautious about lending in the current economic climate. Before you apply, it is crucial to make sure that your business plan is watertight and that your reasons for borrowing are legitimate. Businesses perceived to be a high risk to the bank could be refused a loan.

We can provide a financial assessment of your business before you apply for a loan. Please contact us for more information. 

Considering overdrafts

Overdrafts are credit facilities that contain a set amount of money, agreed between you and your bank. They often provide a flexible means for covering unforeseen expenses and short-term outgoings.

Limits must be agreed in advance, and interest is usually charged on any funds you receive from an overdraft facility. Arrangement or renewal fees may also be payable.

Those seeking to use an overdraft must be cautious: they are not designed to be used as a long-term source of finance, and continued use may cause your bank to question whether your business is struggling financially. 

Grants and government support

Some businesses are eligible for a grant or other type of government support. Typically, grants are provided by local councils, the government and charities, and often prove to be an inexpensive form of financing. Grants and similar subsidies are usually non-repayable, and are therefore highly sought-after.

Government grants are generally only offered to firms operating in specific sectors, and to those working on specific projects. Businesses may be required to cover part of the cost of their project, or to match the funds granted to them.

Invoice discounting and debt factoring

Businesses seeking to raise finance may wish to consider invoice discounting and debt factoring. Invoice discounting provides a means of borrowing money against any unpaid invoices owed to the company. As the invoices are paid, the amount owed to the lender diminishes.

Meanwhile, factoring involves selling unpaid invoices to a third party and paying interest and/or a fee on them. The third party then collects the debt themselves.

We can advise on the most appropriate type of finance to suit your needs – please contact us for more information.