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Business Finance & Investment

Business Finance & Investment
When starting out in business it can often be difficult to raise the finance needed for development and growth, so it is important that you construct a sound and realistic business plan, as well as doing extensive research to see what finance options are most beneficial to your business. We will outline the different options that may be available to you to get you started.

If you are trying to obtain finance for your business, and you are a sole trader, you may wish to consider the limited liability protection associated with becoming a limited company.


Bank Loans
These are common and most people are aware of what a loan is, business rates may be different from what you might expect for a personal loan and the terms may be different, with regards to repayments and security on the loan, so thorough analysis of what each lender is offering must be conducted before any agreement is made.

If you are a Sole Trader or your business is a new limited company with little or no assets, the bank may ask you to use your personal assets (e.g. your house / car) as security on the loan, which means that failure to make repayments would result in the outstanding balance being recovered through the repossession those assets.

Invoice Finance (also available from general finance companies)
If your business has a gap in cash flow, which is where you give business customers credit and receive payment weeks or months after selling the product and paying the costs, you may need to take benefit of a service where you can receive up to 85% of the invoice’s value when it is issued so that you can afford to buy materials for proceeding orders, and then receive the remaining amount when the invoice is paid by customers straight into a nominate trust account with the service provider.

This service requires an accurate sales ledger to be kept, and it would need to be submitted to the bank on a regular basis. You must be able to prove that your business is profitable that you have suitable controls in place to recover any owed money.

This is similar to Invoice Finance but you actually sell on the invoices that you have issued, and the Factoring service provider chases the debt. You do loose around 10% of the invoice’s face value, but the funds can usually be received from the service provider within 24 hours meaning that the gap in your cash flow would be closed.

Some service providers will require that your annual turnover is above a certain amount before they will consider offering the service to you. Once the service is active, it is common practice for service providers to manage your sales ledger.

You may be able to make an arrangement with your bank where you can spend more than what is actually in your account by freely lending up to an agreed amount which you pay interest on while it is lent, and as soon as your account goes back into credit, the interest is no longer charged. This is a quick and flexible form of finance which, if you find a good deal, may only charge a small amount of interest as long as you do not exceed your agreed limit.

If you are looking to purchase property, to operate your business from or simply as an investment, you may consider taking out a mortgage to spread the cost over a long period of time. Once you have paid all money due on the mortgage, you (or your company) will own the property as an asset, and if property prices rise, a profit could be made when it is sold.

Mortgage lenders will charge interest on the amount due, meaning that you will pay back more than you have lent. Interest rates will vary, depending on the lender, and if the rate is variable, it could be influenced by the Bank of England interest rate.

Business Credit Cards
You may wish to have a credit card with your business bank account which allows for the short term borrowing of cash, the balance should be paid back to the lender on a regular basis. Some credit cards have high interest rates, and should only be used if you are confident about managing your finances, otherwise, it could cost you a lot of money.

If you would like to make purchases by card, but you do not want a credit card, you should look at bank accounts with simple debit cards, some of which could have interest free overdrafts as an alternative to high interest credit.

Investment from Family / Friends
If you know of a relative or friend who is contemplating investment, you could ask them to consider investment in your business after letting them read through your business plan.

The investment could be in the form of a loan to you or the business, or alternatively, if you are operating as a Limited Company you may wish to sell shares and accept the payment as shareholders capital. If somebody else buys shares in your company, they may have voting rights which could lead to loss of control over the business, you should therefore think carefully about the sale of shares and research further into shareholder agreements.

Venture Capitalists
Venture Capitalists are organisations that manage the money of established and retired affluent business people who have spare cash to invest in business opportunities; they look for high-potential-growth business to inject cash into, so that they can make a substantial profit from sale, usually within 3 – 7 years.

This can be a risky option, and is not for your everyday local window cleaner. If your idea is big and original, then you could look into it more, but be sure to look at any agreement in great detail and have your solicitor check it as well.

Business Angels
Business Angels are different to Venture Capitalists, as they invest their own money, but still look for large high-potential-growth businesses. If you know or somebody that is a business angel, they may be an ideal solution for your finance needs, even if your needs are on smaller scale.

Business Angels can often offer more than just financial support, they may have invaluable expertise which could help your business develop into a successful and profitable enterprise.

Read our Business Blog for regular updates about finance, the economy, news of interest and related stories.


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